Yields at 24-Year Highs: Are Stocks Brave or Blind?

Grant Calloway

Welcome to the Bull Sheet. I'm Grant Calloway. Yesterday I left you with a puzzle, and this morning the puzzle got bigger. Stocks are climbing again. And the ten year Treasury yield is sitting at 5.31 percent, its highest closing level in twenty four years. Both of those things are true at the same time. Today we try to figure out which one is lying.

Grant Calloway

Let's start with the bond market, because that's the story. The ten year is at levels we haven't seen since 2002. The thirty year was around 5.66 percent this morning and touched 5.7 at one point, also the highest in twenty four years. And remember, this comes after Friday's September jobs report showed just 29,000 jobs. A weak number like that is supposed to pull yields down. Instead, yields shrugged and kept climbing.

Grant Calloway

So why are stocks marching anyway? Two reasons, and they're both about what's in front of the market right now. First, oil blinked. Second, earnings. Kyle Rodda, a senior market analyst at Capital.com, said a less discussed driver is what he called extraordinarily strong, albeit concentrated, earnings growth expectations. Per FactSet, estimates for the coming earnings season have been revised up to nearly thirty percent. That follows fifty percent growth in the second quarter. Notice that word, concentrated. We'll come back to it.

Grant Calloway

Now the tape. As of early this morning, S&P 500 futures were up about half a percent, and the index is less than one percent from its record. Nasdaq 100 futures were up about 0.6 percent, after the Nasdaq Composite closed at a record Monday. Dow futures were up about 0.4 percent, roughly 194 points. Small caps jumped nearly one percent Monday, and the Russell 2000 was holding those gains. Nvidia was up about one percent in premarket, with its market cap closing in on six trillion dollars.

Grant Calloway

Overseas, Japan's Nikkei closed Monday up 2.4 percent at 69,947, a three month high, led by chip and bank names. I don't have a clean read on Europe this morning, and I don't have one on the dollar or crypto either, so I'll skip them rather than guess. In metals, gold futures were up 0.71 percent at about 4,186 dollars an ounce, and silver was up a bit at about 61.31.

Grant Calloway

Now oil, which is the reason the bulls are breathing easier. Brent crude was down 1.64 percent to 98.67 a barrel, back under the hundred dollar mark. West Texas Intermediate was down 1.86 percent to 87.77. The catalyst is the G7 deciding to release 100 million barrels from strategic reserves over the next four months, with a big diesel release front loaded in the first twenty days. On top of that, shipping data showed Middle East crude exports topped pre war levels on four days in the last week of September. Reuters notes traders are still wary, though, because the Houthis keep hitting Saudi targets.

Grant Calloway

And diesel is where Americans feel it. The national average topped six dollars a gallon in September for the first time ever. President Trump signed an order Monday night letting truckers and farmers temporarily use red dyed diesel, the tax exempt kind normally kept for off road work, with related taxes deferred through year end. That exemption is worth 24.4 cents a gallon. Does it help? A little. But I've been around long enough to know a bandage when I see one.

Grant Calloway

Movers, and I'll go quick. All of these are premarket, per TheStreet. Option Care Health is up about 20.5 percent on a report that McKesson and the private equity firm Clayton Dubilier and Rice are closing in on a buyout worth more than five billion dollars including debt. Constellation Energy, the nuclear operator, is up about 9 percent after a twenty year power purchase agreement with Google for 890 megawatts of new nuclear capacity on the PJM grid. Constellation says it will commit more than 4.3 billion dollars to the build out. Cleveland-Cliffs is up about 4.8 percent after Wells Fargo upgraded it to Overweight.

Grant Calloway

On the downside, Tradeweb is off about 4.6 percent, blamed on those multidecade high yields and some profit taking after its latest volume report. Stryker is down about 3.5 percent after announcing that CEO Kevin Lobo moves to executive chairman, and Spencer Stiles, the president and COO, becomes CEO, both effective January first. And Western Digital is down about 2.8 percent on concerns about a possible expansion of Toshiba's hard drive capacity. One more headline: the 110 billion dollar Paramount Skydance and Warner Bros. Discovery merger closed today after Justice Elena Kagan denied a last minute bid to halt it.

Grant Calloway

A quick word from our sponsor. If you've ever wanted a daily show of your own, jellypod.com turns your ideas into a podcast like this one. Go take a look at jellypod.com.

Grant Calloway

Now, the part of the show that earns the name. Bull versus Bear. The question: is a stock market at record highs, with the ten year at 5.31 percent, brave or blind? Let me give you the bull first, and I'll give it a fair shake.

Grant Calloway

The bull says earnings are the only thing that ultimately pays the bills, and they're accelerating. FactSet has third quarter growth estimates revised up toward thirty percent, after fifty percent in the second quarter. Yardeni Research says the S&P 500's price to earnings growth ratio just hit a thirty year low. That's the statistic the bulls love. It says that when you adjust for how fast earnings are growing, stocks aren't expensive. Add the AI buildout, with Foxconn reporting healthy results Monday and Google signing nuclear contracts, and add the G7 giving energy strapped supply chains a little room. The bull says, fine, rates are high, but the profits are higher.

Grant Calloway

Now the bear, and the bear has a point too. The bond market is the grown up in the room, and it's not impressed. A ten year at 5.31 and a thirty year around 5.7 aren't a blip. They suggest the cost of money may be structurally higher. The bear says dyed diesel and reserve releases are temporary patches on a real supply problem. And that word concentrated matters here. If the thirty percent growth is coming mostly from AI names, then the companies outside that club are borrowing against a risk free rate above five percent when their debt rolls over. That's the squeeze.

Grant Calloway

Where do I land? I've traded through two crashes, so I don't dismiss either side. The earnings are real, and I won't tell you they're not. But a PEG ratio is only as good as the growth forecast under it, and forecasts are the cheapest thing on Wall Street. Meanwhile, the bond market isn't forecasting anything. It's pricing. So my read is this: the bulls are right about today, and the bears may be right about the bill. Stocks can climb a wall of worry for a good while. They just can't ignore a ten year at this level forever. Not an investment call, just my read of the tape.

Grant Calloway

On deck. The data calendar is quiet. ADP's weekly employment change for the week ended September 19 is scheduled for 8:15 Eastern, with 20,000 the prior reading. At 8:30 Eastern, the August trade balance, where the expectation is a deficit of about 89.8 billion dollars, versus 88.6 billion prior.

Grant Calloway

The main event is earnings. Constellation Brands reports its fiscal second quarter after the close. The stock closed Monday at 113.31, near the bottom of a 52 week range of 110.60 to 168.60. Yahoo Finance says the focus is beer demand, tariff pressure and margins. Trefis counted twenty reports over the last five years: nine one day gains, eleven losses. The median gain was 2.1 percent, the median loss 3.3 percent, and the extremes were up 8.5 percent and down 17.1 percent. Last time out, in June, the stock fell 1.6 percent. Lamb Weston and RPM International are also on today's earnings calendar.

Grant Calloway

And mark tomorrow. The minutes from the Fed's September meeting land Wednesday at 2 p.m. Eastern, and with yields where they are, folks will read every word.

Grant Calloway

So what matters most today? That ten year yield. If it holds up here, stocks can stay cheerful. If it pushes higher, we'll find out how sturdy this rally really is. Constellation's numbers after the bell are the next test. Join me tomorrow for the Fed minutes and whatever Constellation tells us. And remember, this podcast is for educational purposes only and is not investment advice. Take care of your money out there.