The Rally is Broadening. The Earnings Growth Isn't. Liz Ann Sonders on Which Breaks First

**Matt Zeigler** (0:02)
You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I'm Matt Zeigler, Justin Carbonneau is with me in the co-host seat, and our guest today, I mean, are tech stocks the boys of summer? Are stock and bond correlations singing summer lovin only to break up when it's back to school season? Are we ever, ever on this journey gonna stop believing? Only one person can answer that, and that one person is Liz Ann Sonders. Liz Ann, welcome back to Excess Returns.

**Liz Ann Sonders** (0:32)
Hi, guys, it's so nice to be here, but next time you gotta get a Led Zeppelin song in the tease.

**Matt Zeigler** (0:38)
Okay, will-

**Liz Ann Sonders** (0:39)
That's my request, all right?

**Matt Zeigler** (0:40)
Will the bond levy break or will it?
I've got you. The markets confused a lot of investors in the recent past year with stocks near record highs. You got the 30, you're at multi-decade highs, inflation stuck above 3%, depending who you ask, we're somewhere in that range. How do you think investors should possibly make sense of where we are August 20th, 2026?

**Liz Ann Sonders** (1:06)
Well, I think starting with where we are in the economic cycle, we can't think of this cycle in linear terms.
Not that there's really a true normal cycle, but typically you come out of a recession, you go through the recovery phase and you have an expansion phase, and then a slowdown phase, and then the recession. Certainly, when there's a credit crunch involved or a financial system collapse like in the case of the global financial crisis, it tends to happen in that linear fashion and in the aggregate. Anything but that has been the case in the post-pandemic era, all the way back from during the pandemic where the good side of the economy boomed along with the stimulus, given services were shut down, manufacturing then rolled over when we got the vaccine and services opened back up and you had pent up demand there, pent down demand on the good side. So you went into a manufacturing and goods recession for a few years offset by the services side. Now services has rolled over a bit, but manufacturing has picked up. And I think that ties into the much more rotational nature of the market right now. That is that connection point is sectoral recessions and expansions in the economy happening at different times. And that to some degree is leading to some of these rapid fire rotations, exacerbated by the key players in the market right now, in many cases having time horizons measured in nanoseconds. And you can pull on any of those threads, but that's the broad brush look at not just the economy in the market, but what the connection points are between the two.

**Matt Zeigler** (2:40)
So the market, dare I say, sounds temperamental. And last time you told us about the temperamental era, but then you wrote a note saying this changed a little bit, which is temperamental.
Explain what you're seeing.

**Liz Ann Sonders** (2:50)
All right. So a lot of focus, for good reason, on the now, in the rear-view mirror, the great moderation era, which depending on what metric you're looking at or who you're talking to, there's different start points. But essentially, it goes from the period from the late 1990s, up until the 2022 COVID-related inflation spike. And there were a lot of facets behind why Brian Bernanke, who coined the phrase, called it the great moderation. There was moderate volatility and inflation, generally a disinflationary backdrop fueled in part by massive globalization and the cheap and abundant access to goods, to labor, to energy. China joining the WTO in 2001 So you had a fairly benign interest rate backdrop with the exception of 2008 and the oil price spike.
The most important component of that as it relates to what matters to investors is that bond yields were keying more off the growth side of the equation than on the inflation side of the equation. So in that great moderation era, bond yields and stock prices were inversely correlated.
We're positively correlated, which means their prices were inversely correlated. Meaning that classic, whether it's 60-40 or 60-30-10, at least on paper made a lot of sense because you've had that inverse correlation between bond prices and stock prices. You go back to what we termed the temperamental era from the mid-60s to the late 90s, and almost that entire 30-plus year period of time, bond yields and stock prices moved in the opposite direction, and that's because bond yields most of the time were keying off of the inflation side of the equation, not the growth side of the equation. So inflation rearing its ugly head without the attendant benefit of stronger economic growth, not great for the equity market and vice versa. And of course, that meant that you had a positive correlation between bond prices and stock prices and a bit more of a difficult environment to get that traditional diversification in the two simple asset classes of stocks and bonds. We're back in negative correlation mode right now. I think that's probably a secular shift. That does not mean that equity investors shouldn't have fixed income exposure and vice versa. The good news is that there's been so much democratization of access to other asset classes for individual investors that the ability to take maybe a more endowment-like approach from a diversification standpoint is there, unlike it was during the temple mental era. But I think inflation volatility, maybe not high inflation in perpetuity, but more inflation volatility as it relates to that more monetary policy uncertainty, probably a bit more economic volatility, more geopolitical uncertainty. I just think this also is an environment where I think it's less about uncertainty and it's more about instability. So I think unstable is the better unword to describe the current backdrop than the simple, more simple word of uncertain.