Rate and Market Uncertainty

SPEAKER_1 (0:02)

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Paul Sweeney (0:27)

Seema Shah joins us here, Chief Global Strategist at Principal Asset Management. Seema, I'm looking at US equity markets, kind of hitting all-time highs, kind of as John Tucker in his reporting says, almost every day it seems like earnings, it's been an earnings-driven market. What is your view of corporate earnings going forward? Because boy, the first half of 2026 was just extraordinary.

Seema Shah (0:53)

Yeah, good morning. I think you're absolutely right in that the major theme which has been driving markets this year, there's been geopolitics, there's been tariffs, there's been so much going on and actually, what's driving markets continues to be earnings growth, which makes sense given the tremendous performance to this point, with Q2 being incredibly strong. Now, from here, the math starts to come in, and that is very unlikely that you're going to see this continued pickup in pace when you're already at these 50 percent or so levels. We think it's still strong growth ahead, but the pace, that second derivative starts to show through and you get a slight slowdown. Now, remember, for equities, that doesn't necessarily need to be a hiccup. It doesn't imply pullback by any means, this is still a strong backdrop. But to our minds, I think for the rest of the year, there's a number of challenges, and you've got earnings growth starting to slow a bit. To us, that means slightly more modest gains ahead for the remainder of 26

Tom Keene (1:52)

Let's talk about some of those challenges, Seema, because how much are the midterm elections going to be a hurdle? I don't know if I should call it a hurdle for the stock market.

Seema Shah (2:02)

Yeah, we're clearly getting a lot of questions suddenly since the start of the week about the midterms.

Look, historically, midterms, they create a lot of noise, create a lot of volatility within the market. But actually, what they're typically doing is just reinforcing the trend that was underway already with that trend, of course, being really being driven by fundamentals. So we may see volatility, we may see noise, we may see some headlines which create some concerns within the market. But once the midterms are over and uncertainty starts to clear up again, the market typically returns to focusing on what usually drives it. Then again, that's earnings, that's inflation, that's rates.

So unless the midterms are going to be actually impacting any of those fundamental factors, it shouldn't really be something that investors are focusing on. And certainly, as we're looking through to one of the key policy perspectives or things that could come out from the midterms, the major one is, of course, around data centers. But at this stage, even then, the midterms themselves are unlikely to be the driving force behind what happens next to that data center build-out.

Paul Sweeney (3:07)

Seema, we've got yields higher. I guess this is the new world order here. This is the new normal, I guess, 10-year treasury, 480, the 30-year, 5.25%.

Is that a headwind for equity markets, or are we close to a point where higher rates kind of become a headwind for equity markets? How do you think about that?

Seema Shah (3:29)

It's a really tough one. I think, actually, to my mind, this is probably the biggest question which people are grappling with. Now, typically, you would see that treasury yields, they crossed the 475 mark, and everyone starts to really worry.

But when you've got a lot of that movement being driven by strong growth, again, the fundamentals playing through again, then we actually think that equities can get over that hurdle, right? The earnings are still there in order to propel equities forward. It does create a bit of digestion problems. So this, again, this is a bit of additional noise volatility being introduced into the market. At what point it really does become an issue for equities? I think it's a little bit higher suddenly than what it was before, because of that strong growth backdrop. It may be that we need to get the 5% level, but ultimately what really matters is one, is why are yields rising? Is it down to growth or is it concerns around inflation?

Secondly, what is the speed at which it's moving? We've always seen that when you get a very, very sharp sell-off, that's when equities start to struggle. So there's a number of factors, but at this point in time where the treasury is at 480, to us, this isn't a real concern for equity markets. It just means that maybe the speed limit is a little bit lower for equities for the rest of the year.