Huge disconnect: bond vs. equity

Market snapshot (equities vs. rates)

Equities (US)

• S&P 500: +0.3% (week); +2.8% (past month)
• NASDAQ: +0.1% (week); +1.8% (past month)

Rates

• 10-year U.S. Treasury yield: rising to about 4.7%

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Valuation framework / bond-equity “disconnect” logic

• Uses a relative return / equity premium approach:

  • Assumes a 4% equity premium over the 10-year yield
  • Converts this into an implied expected return on equity (ROE):
    • If 10-year yield = 4.7%, then expected ROE ≈ 8.7%
  • Implied valuation multiple:
    • P/E ≈ 1 / 8.7% = 11.5x

• Sensitivity example:

  • If 10-year yield = 2%, then expected ROE would be 6%
  • Implied P/E ≈ 1 / 6% = 16.7x

Core claim: If yields rise, theoretically P/E multiples should compress / stock prices should face headwind—yet equities have still been rising.

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Why 10-year bond yields are rising (five cited drivers)

1. Inflation / CPI re-acceleration

   • CPI: about 3.4–4%
   • Fed target: ~2%
   • Core CPI: about 2.5%

2. Bond supply / fiscal outlook

   • US plans to expand the defense budget to ~$1.5T
   • Additional supporting amount: ~$200B
   • Mentioned as ~44% increase in defense budget
   • Implication: more issuance → buyers require higher yields

3. Competition from large tech issuing debt (“quasi-sovereign” framing)

   • Big Tech issuing bonds due to AI investment/CapEx
   • Examples named: Google, Amazon, Microsoft
   • Investors treat them as “quasi sovereign credit” → government must offer higher rates to compete

4. Economy still relatively strong

   • Unemployment: ~4.1%
   • ISM PMI and S&P Global PMI: ~54–55 (growth-leaning)
   • Implication: Fed likely keeps rates higher / raises further

5. War uncertainty

   • Bond market prices conservatively: risk premia for geopolitical/energy volatility

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Why equities can rise even as yields rise (two scenarios)

Equity performance rising alongside higher yields is described as possible if either (or both) are true:

1. Economic growth / earnings growth outpaces bond yields

   • Narrative: investors choose between bonds vs equities
   • If bonds yield ~4.7% with low “near-zero risk,” equities need higher expected returns
   • But if companies can grow meaningfully (examples given: 10% / 15% / 20%), equities can still outperform and trade higher

2. Market expects the 10-year yield to have peaked and decline

   • Equity investors are forward-looking
   • Belief that CPI has peaked and Fed won’t keep hiking

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What the speaker thinks is driving equity momentum

• The speaker argues the equity market leans more toward scenario #2 (yields peaking / rate-hike pause) than scenario #1.

AI / Big Tech growth narrative

• “AI investments are off the roof”
• Equity investors expect continued AI growth, but the speaker warns:
  • AI may be growing faster than experts expect, but not as fast as equity investors want
  • This could explain occasional pullbacks

Fed communications / September pause thesis

• Speaker’s view: Fed will not increase rates in September
• Possibly no increase throughout the year, unless “drastic” changes occur

• The speaker cites John Williams (New York Fed governor) remarks (July speech; reiterated early August), including:

  • Tariff effects largely played out
  • Shelter inflation declining
  • Oil prices peaking / retreat toward pre-conflict levels
  • AI-driven investment supporting productivity in coming years
  • Labor market not adding inflation pressure

• Bottom-line narrative attributed to equities:

  1. Yields are high, but equities offer better returns in certain sectors (esp. AI/big tech)
  2. Inflation uncertainty, but Fed signals they won’t hike
  3. Growth persists, inflation peaks, yields gradually come down
  4. “Treasury is helping us with a weird shadow QE” (described loosely; not quantified)
  5. “Nothing to worry about—buy equity”

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Risk / caution points mentioned

• Near-term monitoring is needed because bond investors remain more pessimistic than equities.
• Watch items flagged by the speaker:
  • “Kevin Wars” (unclear name/spelling in subtitles; likely a person related to markets)
  • Concerns about cash flow generation from AI-related businesses
  • IPO pipeline of AI software companies (no tickers provided in subtitles)

Explicit caution is implied: equity optimism may be ahead of fundamentals (especially cash flow vs. growth expectations).

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Explicit tickers / assets / instruments mentioned

• S&P 500 (index)
• NASDAQ (index)
• 10-year Treasury yield (10Y U.S. Treasury, not a specific bond ticker)
• Defensive budget / US defense spending (fiscal driver, not an instrument)
• Companies named (no tickers given): Google, Amazon, Microsoft

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Methodology / framework steps (as stated)

1. Observe the 10-year yield level (≈ 4.7%).
2. Assume a 4% equity premium.
3. Compute implied expected return on equity:
   • Expected ROE = 10Y yield + 4% premium
   • Example: 4.7% + 4% = 8.7%
4. Translate expected ROE into an implied fair P/E multiple:
   • P/E ≈ 1 / expected ROE
5. Compare implied P/E (“required multiple”) with what markets are paying; interpret “disconnect” if equities rise despite rising yields.

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Disclosures / disclaimers

• No explicit “not financial advice” disclaimer appears in the provided subtitles.

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Presenters / sources mentioned

• John Williams (Governor, New York Fed) — cited from a July speech and early August remarks
• Speaker (host) referenced throughout as “Hey guys… I’ll be back…” but no name provided in subtitles.