Markets and Economy Why investors may want to ignore some market headlines

If I didn't know any better, I’d have thought the S&P 500 Index was down over the past month or two.¹ It’s hard to turn on the TV, listen to a podcast, or scroll through social media without hearing about soaring oil prices,² rising interest rates,³ unsustainable debt levels,⁴ stubborn inflation,⁵ a less communicative Federal Reserve (Fed), and the possibility of additional rate hikes.⁶ The pessimism has shown up in investor sentiment surveys as well. The last reading from the American Association of Individual Investors in August found 44.4% of investors bearish compared to 32.9% bullish, with the remainder neutral.⁷

Honestly, that doesn’t bother me much. Bull markets have rarely ended amid widespread skepticism. They end when the conditions that support them begin to deteriorate. We’re nowhere near that point in my view. Still, it’s worth addressing some of the concerns that have been dominating the conversation.

Concern: Oil prices

Let's start with oil.

Higher oil prices are never ideal. They can act like a tax on consumers and businesses, and energy markets have remained vulnerable to geopolitical developments. It’s important to separate headlines from reality; however, oil prices remained below their April 7 high and have been largely flat since the middle of June.⁸ The uncertainty surrounding conflict in the Middle East has been unsettling, but markets and supply chains have proven remarkably adaptable. Alternative pipelines, rerouted tanker traffic, and naval escorts have helped keep energy flowing. By several estimates, energy shipments around the Arabian Peninsula have recovered to roughly 80% of pre-conflict levels.⁹ The situation bears watching, but it’s difficult to argue that energy markets have been spiraling out of control.

Concern: Interest rates

Interest rates are the next major concern.

Higher rates can create winners and losers. Rate-sensitive sectors such as utilities, industrials, and, to a lesser extent, real estate, have felt the pressure.¹⁰ Yet context matters. The US economy has been growing at roughly 6.6% in nominal terms.¹¹ Against that backdrop, a 10-year Treasury yield of approximately 4.75% doesn’t look particularly alarming to me.¹²

In fact, for much of the 1980s and 1990s, long-term Treasury yields were consistently above the nominal growth rate of the economy.¹³ What we experienced in the years following the 2008 Global Financial Crisis was the exception rather than the rule. Many investors became accustomed to a world in which economic growth exceeded borrowing costs by a wide margin. Viewed through a longer historical lens, today's rate environment appears to me more like a normalization than a crisis. That’s why I remain skeptical of the increasingly popular narrative that rising rates represent a debt-driven reckoning for the US. Could debt levels create challenges over time? Perhaps. But positioning portfolios for an imminent US debt comeuppance has been a fool's errand for years in my view. Policymakers possess a substantial arsenal of fiscal, monetary, regulatory, and legislative tools, and history suggests they will not passively observe a disorderly outcome.

Concern: The Fed

Then there’s the Fed.

Markets rightfully worry that cycles end with funding rates moving higher. That has been true. What’s less true is the assumption that one rate hike inevitably becomes many. With inflation expectations relatively contained¹⁴ and job growth modest,¹⁵ the case for an extended series of hikes appears weak to me. I think one hike in September is unlikely to be viewed by markets as a launching point for another major hiking campaign.

Eye on earnings and AI-related spending

Personally, I think many investors may be focused on the wrong things.

The issues commanding headlines today aren’t the developments that would make me genuinely nervous. What I’m watching is earnings. Corporate profits have contributed to the foundation of the durable bull market.

I’m also watching the artificial intelligence (AI) investment cycle. The extraordinary spending by hyperscalers has become one of the most important drivers of economic activity and market leadership in my view. If those companies were to pull back aggressively on capital expenditures, I believe that would matter. If financing markets became reluctant to fund AI-related infrastructure, data centers, and associated bond issuance, that would matter too.

Those are risks worth monitoring. The timing is uncertain. But at least for now, I see little evidence that either is occurring. Earnings have remained resilient.¹⁶ Hyperscaler spending plans remained intact.¹⁷ Capital markets continued to fund AI infrastructure projects.¹⁸

So, while the headlines have continued to focus on oil, rates, debt, and the Fed, I remain more interested in the areas that have been powering growth. Until those fundamentals begin to crack, I suspect many investors may be spending too much time worrying about the wrong things.