Why The S&P Just Hit A Record High — Despite Soaring Yields

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Ed Elson (1:46)

Welcome to Prof G Markets. I'm Ed Elson. It is October 7th. Let's check in on yesterday's market vitals.

The major indices climbed as stock investors grew bullish ahead of earning season. The yield on 10-year treasuries declined slightly but remained near multi-decade highs. Brent crude climbed back above $100 per barrel as industry executives warned that global stockpiles are running low. Meanwhile, Constellation Energy popped more than 12% after Google agreed to a 20-year nuclear power purchasing deal.

Okay, what else is happening? Big Tech just pushed the S&P 500 to its first record close since August. The S&P rose nearly 1% yesterday and it's now up more than 14% so far this year. While the stock market is ripping though, bond yields are still near record highs. On Monday, the 10-year treasury yield closed above 5.3%, its highest level since 2002 According to Kelshe, traders are now betting that the chances of a rate hike before the end of the year are above 70%. In other words, the bond market and the stock market are now telling somewhat opposite stories, which leaves us all wondering who is right. Here to discuss the markets, we are speaking with John Mowrey, Chief Investment Officer at NFJ Investment Group. John, good to see you. The S&P hit a record high which I think was surprising to some, considering the fact that we saw yields rising as much as they did, and usually when yields rise, that means stocks come down. That's not what happened, though. Stocks kept rising. We're now at 14% year-to-date.

What do you make of what's happening here?

John Mowrey (3:35)

Yeah, Ed, it really is remarkable. If you had told me at the start of the year that the 10-year bond yield was going to go to 5.25 or 3%, oil would be at 100% or higher for multiple consecutive days. I think that's kind of textbook. You would have expected the market to be lower. I think the reason that we have seen such resiliency is that we've got forward earnings at nearly 38% for the S&P.

And to contextualize that, the only time you've seen earnings growth at 30% or higher is coming out of recession. So coming out of COVID, coming out of the 2009, the GFC in 2008 That was the only other times you saw that. So the earnings have been incredibly resilient. And what's fascinating, Ed, is actually the market has gotten cheaper, even though it's hitting all time highs as we sit here today.

Ed Elson (4:31)

That's the part. I mean, it is hard in a lot of ways to call the market overvalued right now when you've got the S&P trading at about 19 times forward earnings below its five-year average. I guess the question, I mean, we should try to understand what the risks actually are here.

Some are questioning the earnings themselves. The earnings are exploding, and that's why you've got, based on those forward earnings, a cheaper market. But some people are wondering, to what extent can we trust these earnings? We think that these earnings are sustainable, durable. What do you make of that? Because you're right, the earnings growth is tremendous, and it seems to be the thing that's powering this market.

John Mowrey (5:16)

Yeah, I'd say a couple of things. I mean, look, you're getting a lower multiple, so that's textbook for when you have higher interest rates. So the market is responding appropriately. Interest rates are up, and so that's pushing the multiple down. But you have substantial earnings growth, and that's why the market is at all time high. So if we think about, are those earnings durable? You know, there's a lot of people that look at the AI trade, and they think, hey, is this a bubble? And I might take the other side of the equation.