Schwab's Liz Ann Sonders Talks Bond Yield/Stock Prices

**SPEAKER_1** (0:02)
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**Tom Keene** (0:08)
Liz Ann Sonders, non-chief investment strategist, Charles Schwab with us now. How does an equity view change Liz Ann Sonders, given price down, yield up?

**Liz Ann Sonders** (0:19)
Well, we've been writing about this, and we've talked about it before, Tom, you and I, about a change in eras here. We exited definitively the Great Moderation Era that went from the mid to late 1990s up until the 2022 inflation spike, and that was an environment where you had mostly disinflation, fairly benign inflation risk, relatively limited inflation volatility, as well as limited economic volatility. That shift has sailed, and I think what we're in now is something that looks a little bit more like what we've been calling the temperamental era, which is the period from the mid-60s to the mid-90s.
The big difference between them is the relationship between bond yields and stock prices. So in the temperamental era, you had a very, very consistent relationship where when bond yields went up, stock prices went down, and that's because what was driving yields was more on the inflation side of the spectrum, not the growth side of the spectrum. Great moderation, growth was driving yields. So higher yields, higher stock prices. I think we're reverting back to something that looks a little bit more like the temperamental era.

**Paul Sweeney** (1:22)
So I guess that calls into question maybe even more so. But we need to have a strong view on where rates are going.
How do you guys feel about that, Schwab?

**Liz Ann Sonders** (1:32)
So it's not just the level of rates that I think matters as a feeder into the equity market, but the speed of the move, also the shape of the yield curve. So right now, I think the direction, and maybe more recently, the speed, crews to the disadvantage of the equity market. But the shape of the yield curve right now is still relatively positive. I think the net of all of this is that we have to be a little bit more creative when it comes to diversification, because when you have bond yields and stock prices moving in the opposite direction, that means bond prices and stock prices are moving in the same direction. And that's why you're seeing interest in diversification in other areas, whether it's within the fixed income sphere and the move into corporate debt, or even into things like investing in the whole build out of kind of the sports ecosystem. So I think it requires a thinking about diversification that is a little bit more complex than it has been in an environment where 60-40 tends to work in a more simple way.

**Paul Sweeney** (2:38)
Earnings, corporate America has certainly been doing its part, Liz Ann, with some better than good in the second quarter, better than even in the first quarter, which were pretty stellar themselves. How sustainable is this level of earnings growth, do you think?

**Liz Ann Sonders** (2:52)
Probably not long-term sustainable, and that's maybe the reason why you're not seeing analysts extrapolate the 30% plus surprise factor for the second quarter into quarters consistently out. We've got that differential between where earnings are now and depreciation catching up as it relates to the AI spend. I think that has to be taken into consideration. This is the first time ever we've seen a parabolic ascent like this in earnings. July 1st, the consensus was for 24% growth for the second quarter. We're now over 50%.
That move up from a growth rate change perspective is unmatched, other than coming out of the two most recent recessions, where the base effects accrued to the benefit of that surge in earnings. That's clearly not the case this time.

**Tom Keene** (3:40)
Liz Ann Sonders, we're going to continue with her. She's, of course, with Charles Schwab here. Futures deteriorate, negative 36 I'm not to a 16 VIX yet. As Liz Ann suggests, there's a contained feeling to this, even with a backup in yields. 4.19 in the two year.
Rounded up 4.74% in the 10 year. The 30 year, we had a 5.33.
Right now comes into a 5.32. Robin Brooks, who's been wonderful on this, publishes like eight charts on Twitter of all the different governments. He leads with US and France. He's the most fragile. That's his opinion. I'm not giving my opinion here, but there it is. Some economic data out. Import prices come in below survey. They're up bigly, but not like what was expected. Housing starts a little soggy to say at least there's some energy on the screen here as we look at that with yields coming in a little bit. We continue with Liz Ann Sonders of Charles Schwab. Liz Ann, how far out is your view? When you started out, I remember this, she was 15