Everything Says Stocks Should CRASH.. So Why Aren't They?

Finance-Focused Summary (Markets, Investing, Portfolio Construction)

Why stocks “should” be falling (but aren’t)

• Rates / bonds

  • The 10-year US Treasury yield rose to 5.342% (highest level since 2002).
  • In Q3 alone, it rose >85 bps (largest quarterly increase in ~50 years).
  • Higher Treasury yields lift the “risk-free” return and pressure stock valuations.

• Oil / inflation risk

  • Brent crude rose ~40% in the last quarter, potentially feeding into costs across transportation, shipping, airlines, manufacturing, plastics, agriculture, and other areas.

• Fed policy

  • The Fed raised the base rate to 3.75%–4% in early September (first increase in 3 years).

Macro / inflation specifics cited

• PCE price index: +0.3% month-on-month (Aug) vs 0.4% expected (better than expected)
• Core PCE: +0.2% month-on-month, +3% year-on-year
• The Fed’s inflation target remains 2%, so inflation is still described as above target.

Market-implied Fed path changed after inflation data

• Probability of another October rate hike fell:
  • ~70% (beginning of week) → ~51.5% before report → ~41.5% after report
• The underlying thesis: rates and energy still point “higher for longer,” even if inflation prints cool.

Why stocks remain resilient: earnings

• S&P 500 earnings growth: expected >35% in 2026 (described as strongest annual earnings growth since 2021)
• Corporate profits growth (Q2): +53.7%
• Valuation / forward multiple compression
  • At the start of 2026, the S&P 500 traded around ~22x forward earnings.
  • “Today” it’s about 19.2 (framed as valuations declining as profits rise).
• Key implication: if earnings keep rising, the market may absorb worse macro headlines.

AI concentration and “market breadth” risk (hidden weakness)

• AI spending
  • Five largest AI “hyperscalers” expected to spend just over $800B in 2026
  • Rising to ~$1.1T in 2027
• Index strength may mask weakness
  • About 40% of S&P 500 companies down in value this year
  • About 1/4 of the S&P 500 down at least 10%
  • Goldman Sachs strategist: market breadth lowest since 2000
  • > half of S&P 500 market cap attributed to AI-related companies (concentration risk)
• Explicit warning: if AI (or AI-linked stocks) “goes down,” major indices can fall even if the broader economy hasn’t fully deteriorated.

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Scenario Framework (Four Possible Scenarios)

Rather than forecasting one path, the speaker suggests planning for multiple outcomes:

1. AI boom continues

   • Profits stay high, AI spending rises, inflation gradually declines
   • Preference: broad stock indexes + growth

2. Inflation stable, higher oil, elevated rates

   • Rates remain high; growth stocks may stagnate
   • Preference: value stocks, dividend companies, broader diversification

3. Recession

   • Slower consumer spending, rising unemployment, profits fall
   • Preference: high-quality bonds and cash

4. Complete stock market collapse

   • For long-term investors who don’t need money soon, it could become an opportunity
   • (Historical drawdowns and recovery discussed)

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Historical Drawdown / Return Stats Used to Justify Staying Invested

• Since 1980, the S&P 500 has had an average intra-year decline ~14%, yet the average annual return over that period is about +13%.
• From 1950–2022:
  • After corrections (<20% decline): average return after a market low ~30% per year
  • After bear markets (≥20% decline): average return after bottom ~37% per year
• Caveat: no one knows how far or how long a collapse lasts while it’s happening.

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Portfolio Construction Method (Step-by-Step Framework)

“How I would build a portfolio if I had no idea what was coming next,” using diversified allocations that can work across scenarios:

• Core (productive assets / broad equity): 60–80%

  • Examples: broad US stock index (e.g., S&P 500, “overall US stock market”) and a reference to a “three-fund portfolio.”

• Diversifiers: 10–25% (depends on situation)

  • Examples mentioned: international stocks, small-cap, value stocks, dividends, or other market sectors.

• Bonds and cash: 10–30%

  • Allocation depends on age, risk tolerance, and how soon funds are needed.

• Individual stock option (not central)

  • If desired: AI-related companies or researched “blue chips”
  • Guidance: keep most exposure in ETFs, not single stocks

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Explicit Recommendations / Cautions (Risk Management)

• Don’t build your plan around guessing rates, inflation, or AI.
• If retired / near-term spend risk: build a “safety cushion” and keep reserves outside stocks.
• ETF preference: easier maintenance and less need to time selling.

Three portfolio self-check questions

1. If the market falls 30% tomorrow, would you have to sell stocks to pay bills?
   • If yes: you may lack enough cash/bonds/stable assets.
2. If the market rises another 30%, is your allocation enough to participate?
   • If no: you may be overly cautious due to fear.
3. If your main economic forecast is wrong, will your plan still work?
   • Framed as by far the most important.

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Tickers / ETFs / Assets Mentioned

• Indexes: S&P 500, NASDAQ
• Macro benchmarks:
  • US 10-year Treasury yield (10-year Treasury)
  • Brent crude oil
• ETF examples (dividends/value & stability):
  • SCHD (Schwab U.S. Dividend Equity ETF)
  • VTV (Vanguard Value ETF)

No specific corporate stock tickers were provided; AI exposure was referenced via “AI-related companies” and “hyperscalers” (not individually named).

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Key Numbers / Metrics to Retain

• 10-year Treasury yield: 5.342%; +85 bps+ in Q3 (largest in ~50 years)
• Fed interest rate range: 3.75%–4%
• PCE: +0.3% MoM (Aug) vs 0.4% expected; core PCE +0.2% MoM, +3% YoY
• Oil: Brent +~40% over the quarter
• Earnings: S&P 500 expected +>35% in 2026; Q2 profit growth +53.7%
• Valuation multiple: forward P/E from ~22x to ~19.2 (as profits rose)
• AI spend projections: $800B (2026) → ~$1.1T (2027)
• Market breadth / risk indicators: breadth lowest since 2000; ~40% of S&P 500 down YTD; ~25% down 10%+
• Portfolio allocation ranges: 60–80% stocks, 10–25% diversifiers, 10–30% bonds/cash
• Historical drawdown/returns: average intra-year decline ~14%; average annual return ~+13% since 1980; post-low returns ~30%/yr (corrections) and ~37%/yr (bear markets)

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Disclosures / Disclaimers

• “Any investment involves risk”
• “This is not financial advice”
• “I am not a financial advisor”

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Presenter / Sources

• Presenter/Speaker: Nolan Goa (referred to as Professor Ji)
• External source cited: Goldman Sachs strategist (market breadth lowest since 2000)