Good morning, investors. Robinhood is hosting its annual investor summit in Houston this week, and I’ll be on the ground at the conference and speaking on stage.

If you are here, come say hi!

Now let’s get to the talk of the town.

Not one investor in January would have predicted the stock market to rise 13% while the 10-year Treasury yield surged 100 basis points to a two-decade high.

Higher yields are supposed to hurt stocks by raising the discount rate on future profits. Yet because earnings have been so strong this year, that dynamic has barely shown up. Record profits have carried the market’s valuation math and made stocks cheaper in the process.

The equity risk premium — the gap between S&P 500 earnings yield and Treasury yields — has effectively not moved since January. 

The setup now resembles a classic mid-cycle market, according to Morgan Stanley strategist Andrew Sheets. 

“Consider a world where rates are rising alongside ‘hot’ market conditions,” Sheets wrote in a note Sunday.

“It’s entirely plausible that, given that buoyant backdrop, investors find a way to raise expectations for future growth…faster.” 

Morgan Stanley sees median S&P 500 EPS growth in the mid-teens this year, with earnings revisions near cycle highs.

Meanwhile, Europe and Asia are also coming off some of their strongest earnings seasons in years.

Since 1998, the earnings bond-yield has explained only about 10% of stock-versus-bond returns over the next 12 months.

Expand it to a three-year outlook and it explains about half.

Similarly, short-term changes in yields do not typically have short-term predictive power.

“Markets, after all, are not equations solved once a quarter,” Sheets maintained.

“They are arguments about the future. And when growth is strong, investors are more willing to give g the benefit of the doubt.”

That optimism about growth helps explain the stock market’s resilience in the face of 5.1% Treasury yields.

Partner content:

Michael Proffe has spent 30+ years beating the market and identifying powerful market trends. 

He turned $30,000 into $3 million with his trend-following strategy.

Now, he’s zeroed in on three stocks he believes could be major beneficiaries of AI’s next phase — and they’re not the names you’d expect.

📊 Tech companies have raised more than $400 billion in AI-linked bonds this year. Alphabet, Amazon, Meta, Microsoft and Oracle account for the bulk of capex forecasts, and Fed Chair Kevin Warsh said the competition for capital "partly explains" rising bond yields. (Yahoo Finance)

🛢 President Trump said Iran offered to reopen the Strait of Hormuz and he rejected it. He said Tehran is "losing so badly" and hinted at resuming strikes after the US midterms. (Yahoo Finance)

🗓 September 28, 2008: The Dutch, Belgian, and Luxembourg governments announced an €11.2 billion emergency bailout of Fortis, at the time the twentieth-largest business in the world by revenue, marking the first major European bank casualty of the global financial crisis.

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