Market Starting To Crack Under High Bond Yields? | Michael Lebowitz

Market Stress Despite a Calm S&P 500

Michael Lebowitz, co-portfolio manager at RIA (interviewed by Adam Taggart on Thoughtful Money), argues that markets are beginning to show stress from sustained high bond yields—even if major indexes like the S&P 500 don’t clearly reflect it.

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Bond Yields and the “Time Lag” Into the Real Economy

Lebowitz says the economic impact of higher rates depends on which part of the yield curve moves:

• Shorter-term rates transmit quickly Example: Fed funds affecting credit card rates and floating-rate corporate loans.

• Longer-term rates take longer to work through the economy Example: impacts via mortgages, corporate refinancing, and capital expenditures.

He highlights a refinancing dynamic:

• Corporate bonds issued at low rates (2021) are now maturing or nearing maturity.
• Refinancing costs may jump sharply—for example, from ~2.5% to ~6%.
• Firms may respond by cutting headcount, capex, and potentially store closures, among other actions.

Lebowitz’s view is that the current pattern can persist, but the “drag” eventually grows strong enough that “everything starts to crack.”

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Why the S&P Can Look Calm While Parts of the Market Bleed

A central theme is market dispersion:

• Mega-caps tied to big-tech/AI can mask weakness, keeping the S&P 500 looking relatively stable.
• In contrast:
  • The S&P 500 benefits from a small number of very large names.
  • The equal-weighted S&P (RSP) and interest-rate-sensitive sectors (e.g., utilities, real estate, financials, small caps) show more pronounced weakness—down more than the index.

He frames this as potentially either:

• Growing weakness if rates keep rising, or
• Rotation, with capital moving from “tech/AI” into other areas.

He also suggests a possible “grand rotation”: sectors that have lagged in the lower-left of his rotation model could eventually outperform if tech cools.

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The Market’s Biggest Fundamental Risks: AI Timing and Interest-Rate Pressure

Lebowitz shifts from macro rates to the AI investment cycle:

• He supports the idea that AI capex is boosting certain profit pools (e.g., chips and data centers).
• However, he questions whether this is translating into broad corporate revenue gains across the “rest of corporate America.”

Key risks he raises include:

• “AI dot-com” timing risk Benefits may arrive later than what current valuations assume.

• Hyperscalers could slow or defer data center build-outs Potential drivers include financial caution and practical constraints (construction, permitting, water, talent, and municipal resistance). This could soften demand for compute and potentially affect pricing for AI-exposed companies.

• Depreciation / shelf-life risk As compute efficiency improves (e.g., Moore’s Law, smaller/cheaper models, open models), some data center investment may become less productive sooner than expected.

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Capital Shifting Into Bonds (TINA → “Something Else”)

Lebowitz argues investors now have a credible alternative to stocks:

• Locking in high yields with relatively less risk is becoming more attractive.

He describes a shift from:

• TINA (“There Is No Alternative”) to an “alternative” where capital can rebalance from highly valued equities into higher-yielding debt instruments.

This supports the importance of:

• financial planning and asset allocation tied to goals—not just chasing returns.

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Inflation Outlook: “Real Rates” Matter More Than Headlines

Lebowitz emphasizes monitoring:

• core inflation

While noting that energy costs (oil/diesel) and geopolitics can keep those costs elevated, he argues:

• Even if inflation expectations aren’t surging, rising bond yields imply higher “real rates.”
• Higher real rates tighten financial conditions and apply pressure to the economy.

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Fed Uncertainty and Yield-Curve Behavior

Using slides, he points out that:

• yield-curve changes are concentrated in the 1–5 year sector, suggesting policy/expectations are influencing the part of the curve most relevant to many loans and economic activity.

He also criticizes what he sees as an inconsistency in Fed messaging:

• Even if inflation and economic forecasts don’t improve, the Fed raised expected future rates (the implied path for the next year).
• He views that as odd given the assumption that higher rates affect the economy.

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Corporate Credit: Restructuring and “Zombie” Dynamics

Lebowitz notes ongoing corporate debt refinancing/restructuring:

• Many firms appear to be surviving by extending or restructuring debt,
• even though later maturities could still strain the system.

He expects more stress in the corporate credit backdrop even if broader markets look calm.

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Bottom-Line Market Expectations (Qualitative)

If bond yields remain high or rise further, Lebowitz expects greater economic headwinds.

He still suggests yields could eventually decline around 2027–2028, but until then he believes:

• dispersion and rotation will matter,
• oil-price volatility can swing everything (including yields and stocks),
• and the market may be underestimating how quickly real-rate pressure reaches profits.

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“Deals/Trades of the Week” (Portfolio Positioning)

Lebowitz says his firm is positioning for rotation:

• Reduced mega-cap/large-cap growth exposure and added value
• In the “stock model”:
  • added some utilities
  • plans to cut some technology
  • plans to add more value over the coming week(s)

He notes a risk:

• If oil jumps (e.g., to around $120), value stocks may not perform well immediately.

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Presenters / Contributors

• Adam Taggart — host, founder of Thoughtful Money
• Michael Lebowitz — co-portfolio manager at RIA