I hope you are having a nice week and enjoying seeing the leaves change. Below are my thoughts and related charts on the markets and the economy. 

The biggest thorn in the side of the stock market right now is the steady increase in interest rates. The 10-year Treasury bond yield is currently at 5.1%, a 5-year high. Rates have risen due to higher oil prices, sticky inflation and an economy that remains on solid footing. To cool down inflation, the Federal Reserve raised rates last week and is expected to do it again later this year.

What happens to stock market returns when the 10-year Treasury yield goes above 5%?

Historically, stock market returns were below average when rates were above 5%. The 10-year Treasury bond is an important measure of corporate valuations and borrowing costs for consumers and businesses. Businesses are valued based upon the present value of their future cash flows and a discount rate. The present value of a business’s future cash flows declines when interest rates go up. Hence, when interest rates go up, valuations decline thus returns are lower than average. The longer rates stay higher, the more they grate on the valuation of stocks.

What could cause interest rates to decline? A clear resolution to the conflict in Iran could lead to a decline in oil prices. This would help tamp down inflation and relieve pressure on consumers. Currently, the correlation between the 10-year Treasury yield and oil prices is at a 35-year high so any relief from oil would provide a catalyst for stocks.

As I have previously written, the Magnificent Seven stocks (Apple, Microsoft, Google, Tesla, NVIDIA, Amazon and Meta) were laggards in the first half of 2026, declining -2.5%. Worries over capex spending on A.I. weighed on the shares. Since June 30th, the Mag 7 has roared back and has returned nearly 13%. The third chart below shows the relative performance of the Mag 7 to the stock market.  

These stocks are staging a comeback as investors are less worried about software stocks (Microsoft) being disrupted by A.I., the anticipated launch of a newly designed iPhone (Apple) and the launch of Meta’s new personal A.I. agent Muse.

One lesson we have learned is that when Mag 7 stocks are out of favor, it often pays to stick with them. Remember in 2025 when people thought Google would be disrupted by A.I.? Shares went through a 32% drawdown only to rally 132% off the bottom. These companies continue to innovate on a scale that we have never seen before, which makes them harder to disrupt.

Speaking of size, OpenAI and Anthropic are expected to go public in the coming months at record valuations. While shares of SpaceX are off their highs by about a third, they went public at a $2T valuation. Anthropic and OpenAI are expected to go public at valuations of $2T and $1.2T. It doesn’t take a rocket scientist to figure out that the demand for A.I. related stocks remains high.

We have entered a new paradigm where companies are staying in the private markets longer and going public at larger valuations. These three companies are estimated to go public at a combined valuation of $5.2T which is higher than the 3,365 U.S. tech companies that went public from 1980 to 2025. At these valuations, Anthropic and OpenAI would rank roughly sixth and eighth in size within the S&P 500 index. 

Warren Buffett, the greatest investor of all time, retired last week at the ripe old age of 96 as he stepped down as Chairman of the Board of Berkshire Hathaway. What makes him the greatest? Berkshire Hathaway could have its stock price fall 99% and it would still match the S&P 500 since 1965 (when Buffett took over).

I don’t think we will see another investor with a long-term track record like this ever again. 

Sports minute: Credit to the Cleveland Guardians for turning their season around. They will make the playoffs but get in via the Wild Card. This is the eighth time in the last 11 years that they have made the playoffs, despite having an owner who flies Southwest Airlines. The Chicago White Sox will win the AL Central because they have an easier remaining schedule and own the tiebreaker over the Guardians. Clutch hitting and great pitching are the formula to win the playoffs and hopefully the bullpen can hold up. Kudos to the Cleveland Browns for remaining undefeated against Baker Mayfield and bouncing back from a terrible week 1 performance. Good to see the young players contributing but they need to get into a position to draft a QB high in the 2027 NFL Draft.

Thanks for reading!

Raz