Riding the Wave

• Long Treasury yields reached 4.95% (10-year), well above the firm's 4.2% forecast, driven by inflation concerns and debt worries rather than Fed policy, with oil near $100 due to ongoing conflict in Iran
• Tech sector cash flow exceeds $1 trillion annually with free cash flow roughly equal to earnings, passing most 'bubble' indicators, though the firm trimmed semiconductors and broad tech while adding to software
• S&P 500 trades around 20x earnings, with Treasury yields now providing genuine competition for investor capital, ending the 'financial repression era' of 2008-2021 when stocks were meaningfully undervalued relative to bonds

Market Summary: Equity Outlook Amid Rising Yields

Key Investment Thesis:

Financial analysts maintain a constructive outlook on equities despite rising Treasury yields, recommending investors shift toward yield-generating strategies. The firm has reduced equity overweight positions, closed duration underweights, and increased covered call allocations.

What They Got Right:

• 2026 forecast for continued AI spending boom without bubble conditions has materialized
• Earnings remain strong with S&P 500 companies delivering excellent results
• U.S. tech sector generating over $1 trillion in free cash flow annually, demonstrating fundamental strength

What They Missed:

• 10-year Treasury yields surged past 4.2% forecast, reaching 4.95%
• Inflation remained elevated, driven by oil prices near $100 due to ongoing conflict in Iran
• Bond market volatility exceeded expectations, creating meaningful competition for investor capital

Bubble Watch Indicators:

Most warning signs remain benign: margin debt levels are reasonable, Nasdaq 100 companies are profitable (unlike 1999), and the critical EBIT-to-free-cash-flow spread shows no divergence. However, tech capital intensity is rising as hyperscaler capex increases, prompting portfolio adjustments including trimming semiconductors while adding software exposure.

Market Implications:

The 4.95% risk-free rate on 10-year Treasuries now presents genuine competition to equity valuations at 20x earnings. The "financial repression era" (2008-2021) has ended, fundamentally changing the stocks-versus-bonds calculus.

Positioning:

Analysts advocate "getting paid to wait" through yield strategies while maintaining positive equity exposure. They view potential pullbacks as opportunities rather than exit signals, provided the economy avoids stagflation and earnings remain robust.

2027 Outlook Risk: Uncertainty around Fed policy, debt levels, and geopolitical tensions warrant reduced position sizing despite ongoing optimism.