Market skeptics and commenters on social media will watch a single variable move in what they consider an unfavorable way, and then jump to the conclusion that the stock market is in trouble.
Maybe the market eventually moves as they predicted. Sometimes that happens.
But markets are complicated, and they’ll often move in counterintuitive ways.
Consider the recent rally in long-term interest rates. That’s gotta be bad news for the stock market, right? Not necessarily.
In his note to clients on Wednesday, Nick Colas, co-founder of DataTrek Research, challenged the idea that rising rates automatically mean lower stock market valuations. From his note: “You have probably heard this sequence of statements many times: Long-term interest rates are increasing. This means that the present value of future cash flows is declining. Therefore, equity valuations should drop as well.“
TKer subscribers aren’t strangers to this theory.
Colas dismantled this oversimplification, flagging two big problems with the shoddy argument he just summarized.
“The first is that it doesn’t work in real life,” he wrote.
He pointed at 2015 to 2019, when the 10-year U.S. Treasury note yielded an average 2.27%. During that period, the S&P 500’s forward price-to-earnings (P/E) ratio was between 15x and 18x earnings.
He then noted that as of Wednesday, the 10-year yield is now much higher at 4.49%, and yet the forward P/E is also much higher at 21x earnings.
In short, the market didn’t do what some skeptics might’ve assumed.
But does this mean the stock market is irrational? No.
“The second reason that yields and equity valuations move independently of each other comes down to discounted cash flow math,” Colas wrote.
Instead of quoting too much of his work here, I’ll recommend you sign up for his and his colleague Jessica Rabe’s work at DataTrekResearch.com.
But the takeaway from his analysis is that an increase in interest rates is theoretically bad for valuations if you don’t consider earnings growth.
“If interest rates go up 2 percentage points (as they have since 2020) but earnings growth expectations increase by 3 percent, then equity valuations actually increase,” he wrote.
It’s such a refreshingly simple observation that speaks to a massive mistake some short-sighted market prognosticators keep making. And that mistake is adjusting one variable in a complex formula while holding all other variables constant.
In the real world, all other variables are never constant. With the passage of time, a lot of things change. This includes earnings, which we’ve seen trend higher for decades.
Whether it’s rising interest rates, a stronger dollar, higher tax rates, elevated energy prices, falling rate cut odds, above-average valuations, or a shrinking equity risk premium, investors should be wary of jumping to conclusions after seeing a single metric move unfavorably.
To Colas’ point, you’ll often find historical examples of the market doing the opposite of what you might’ve intuited.
Furthermore, the closer you look, the more likely it is that you’ll find other variables moving in ways that provide a theoretically sound justification for why stocks do what they do.
This is not to say that investors and traders are always rational and never wrong. Rather, it’s all just a reminder that markets are complicated and deserving of analysis that involves more than an assumption based on the move of one variable.
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Related from TKer:
📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,599.38 and a closing high of 7,580.06 on Friday. The index is up 10.7% year-to-date. For market insights, check out the Stock Market tab at TKer. »
There were several notable data points and macroeconomic developments since our last review:
🎈 Fed’s preferred inflation measure jumped on higher energy prices. The personal consumption expenditures (PCE) price index in April was up 3.8% from a year ago, fueled by higher energy prices. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 3.3% during the month, up from March’s 3.2% rate.
On a month-over-month basis, the core PCE price index was up 0.24%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core PCE climbed 3.8%.
While inflation rates remain above the Federal Reserve’s 2% target, they are down considerably from peak levels just a few years ago. Nevertheless, the recent move higher bears watching.
For more on the Fed’s impact on markets, read: ‘When will the Fed cut rates?’ is not the right question for investors right now ✂️
⛽️ Gas and diesel prices decline but remain elevated. From AAA: “The national average for a gallon of regular gasoline is down 12 cents from last week at $4.42. Crude oil prices have been going down this week amid reports of peace talks with Iran. But the fragile situation could cause oil prices to spike again if a ceasefire deal isn’t reached. The chart below shows how the national average has fluctuated in recent weeks. Gas prices remain the highest they’ve been in four years and will likely remain elevated as the busy summer driving season gets underway.“
Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.
For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊
🛍️ Consumer spending ticks higher. According to BEA data, personal consumption expenditures increased 0.5% month-over-month in April to an annual rate of $21.98 trillion, an all-time high.
Adjusted for inflation, real personal consumption expenditures increased 0.1% from the prior month to another all-time high.
Here’s a breakdown of spending growth by category.
💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 5.7% y/y in the week ending May 23, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 4.5% y/y. Memorial Day timing impact is minimal as both ‘25 & ‘26 include the Fri before the holiday. Consumers continue to spend at a healthy pace even as the tailwind from the OBBBA related stimulus is behind them.“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️
👎 Consumer vibes remain in the dumps. The Conference Board’s Consumer Confidence Index declined 0.7 points in May. From the report: “Consumer confidence edged downward in May as the inflationary impacts of the war in the Middle East intensified. Consumer appraisals of current business conditions and the current labor market were moderately less positive compared to last month. This was somewhat offset by modest improvements in consumers’ expectations for business conditions and the labor market six months from now. Meanwhile, income expectations eased in May, as those anticipating less income rose.”
More from the report: “Among age groups, confidence ticked up for consumers aged 35-54, but trended downward for older and younger consumers, both month-over-month and on a six-month moving average basis. By income, confidence among higher income groups trended upward on a six-month moving average basis. By generation, confidence improved for the Silent Generation (the oldest group) but was little changed or lower among other generations. By political affiliation, Republicans remained the most optimistic, while Independents were the only group that saw confidence tick up on a month-over-month basis.”
For more on consumer sentiment, read: What consumers do > what consumers say 🙊 and The economy may not be working for everyone right now, but it’s at least working for stock market investors 🎭
👎 Consumers don’t feel good about the labor market. From The Conference Board: “On net, consumers’ views of the labor market worsened slightly in May. 25.5% of consumers said jobs were ‘plentiful,’ down from 26.9% in April. Conversely, 18.6% of consumers said jobs were ‘hard to get,’ down from 19.4%.”
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential). While the metric improved recently, the direction of the spread reflects a cooling labor market.
More from The Conference Board: “Consumers were also more positive about the labor market outlook in May. 17.5% of consumers expected more jobs to be available, up from 16.7% in April. 26.0% anticipated fewer jobs, down from 26.8%.”
For more on the labor market, read: The labor market is cooling 💼
💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 215,000 during the week ending May 23, up from 210,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.786 million during the week ending May 16.
For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾
🤔 Recent private job growth is stable. According to payroll processor ADP, private U.S. employers added 35,750 jobs in the four weeks ending May 9.
For more on the labor market, read: The next couple of years for the job market could be tough 🫤
👎 CEO confidence tumbles. From The Conference Board’s Dana Peterson: “CEOs reported that the economy is materially worse now than it was six months ago and expected economic conditions to weaken further over the next six months. Regarding their own industries, CEO assessments about current conditions and expectations in six months deteriorated since last quarter.”
From the firm’s Roger Ferguson: “Among top business risks impacting their industries, CEOs became more worried about cyber risks, with nearly two thirds ranking it a top risk in Q2. Geopolitical and AI & new technology risks also remained top concerns. Risks associated with supply chains and energy rose in importance and intensity in Q2.“
For more on cyber risks, read: Bizarre moment at Berkshire’s annual meeting spotlights cyber risk🤖
🏭 Business investment activity ticks lower. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 1.1% to $82.4 billion in April.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road.
🏠 Mortgage rates rise. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.53%, up from 6.51% last week. From Freddie Mac: “Pending home sales have increased three months in a row, indicating there’s latent demand and homebuyers are ready to jump back into the market if mortgage rates decline.“
As of Q1, there were 147.6 million housing units in the U.S., of which 86.0 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏘️ New home sales fell. Sales of newly built homes declined 6.2% in April to an annualized rate of 622,000 units.
New home sales figures come with a large margin of error. For more on this, read: Mathematical context can totally change the story 🧮
🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 0.7% year-over-year in March but declined 0.2% month-over-month. From S&P Dow Jones Indices’ Nicholas Godec: “More than half of the 20 major U.S. housing markets recorded year-over-year price declines in March, reflecting a broadening and deepening housing slowdown. … With consumer inflation accelerating to roughly 3.3% in March, U.S. home values have now fallen in real terms for the 10th consecutive month, underscoring an ongoing erosion of inflation-adjusted housing wealth.”
For more on how home prices may be affecting saving, read: A contrarian note about the falling personal saving rate…💸
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.8% rate in Q2.
For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.
Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.
It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
