⚡️Market Strategy Flash
October 2, 2026
Despite all the anxiety about higher interest rates, US large market capitalization stocks are less than 2% below their all-time closing high. In my view, rising bond yields make sense and are reasonable, insofar as the increase is being driven by economic growth (see the chart below).
Bond Yield Ascent – A Story of Economic Resilience, Not Distress
Source: FRED, WCG, 9/30/26. Notes: NBER = National Bureau of Economic Research. GDP = Gross domestic product. Indices are unmanaged and cannot be invested in directly. Past performance does not guarantee future results.
Sorting Out the Confusion
There are different ways of decomposing the 10-year Treasury yield to explain where the upward pressure’s coming from. I’ve spilled enough ink writing about the “term premium,” which has surged almost 79% year to date (YTD), but I’ll set that nebulous, theoretical concept aside for now. “Real yields” – which have increased over 50% YTD – represent more than 55% of the current level of the “nominal” 10-year Treasury yield, suggesting that the bond yield backup has been driven largely by underlying economic resilience. Indeed, the “breakeven” inflation rate has barely budged (see the table below).
Decomposing the 10-Year Treasury Yield (%) – It’s About Growth, Not Inflation
Source: FRED, WCG, 9/30/26. Notes: Real = Inflation adjusted. Breakeven = The nominal yield minus the real yield or the market-implied 10-year expected inflation plus an inflation risk premium. FFR = Federal funds rate. YTD = Year to date.
Should Equity Investors Be Concerned?
No, because S&P 500 returns were 4.5 percentage points (ppts) better in positive “carry trade” regimes (10.1%) than they were in negative “carry trade” regimes (5.6%) since 1980. Presently, nominal gross domestic product (GDP) growth sits comfortably above the 10-year Treasury yield by about 2.0%, meaning stocks remain in the “buy zone” (see the chart below).
Keep Calm and Carry On – Financial Conditions Support Risk Taking
Source: FRED, WCG, 9/30/26. Notes: UST = United States Treasury. CAGR = Compound annual growth rate. Delta = Difference or excess return. Past performance does not guarantee future results.
Isn’t the “Yield Curve” a Better Proxy for the “Carry Trade?”
Yes, the difference between the 10-year and 2-year Treasury yield works, too! On that basis, S&P 500 returns were 5.1ppts better in positive “carry trade” regimes (7.4%) than they were in negative “carry trade” regimes (2.3%) since 1980. Currently, the 10-year Treasury bond yield rests roughly 0.4ppts above its 2-year counterpart, meaning the curve is “normally sloped” and US monetary policy makers are underwriting risk (see the chart below).
Underwriting Growth – Stocks Did Better When the Yield Curve Was Normally Sloped
Source: FRED, WCG, 9/30/26. Notes: Past performance does not guarantee future results.
“The best is yet to be” – Rabbi Ben Ezra, Robert Browning
Recall that September’s notorious for being the weakest month of the calendar year. As such, I’m inclined to look past the recent sluggishness in share prices and view stock market breadth as a glass half full, not half empty. After all, we’ve just entered the best season for US equity returns! In my humble opinion, the S&P 500 is likely to rally into 1Q27 and participation should improve alongside it because the economic and earnings expansion has plenty of runway.
*Market StrategyFlash,The Bond Market Isn’t Screaming – You’re Just Listening to the Wrong People, July 24, 2026
*Market StrategyFlash,Treasury Yields: Water Finds Its Own Level, May 29, 2026
*Market StrategyFlash,Why bond yields have increased around the world, June 4, 2025
Definitions
S&P 500: A stock market index tracking the performance of 500 of the largest publicly traded companies in the United States. It serves as a primary benchmark for the overall health of the U.S. stock market.
10-year US Treasury note: A government debt security issued by the US Department of the Treasury that pays the holder a fixed interest rate every six months and matures in 10 years, at which time the principal amount is returned to the investor.
GDP: The value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.
Carry Trade:The net return you make simply by holding an asset for the long run, despite its near-term price fluctuations. Think of it as the income that an asset generates while sitting in your portfolio, minus the ongoing costs to finance, insure and / or store it. Essentially, being paid to wait is the foundational concept beneath the developed world and our entire financial system.
Term Premium: The extra compensation or higher yield that investors demand for holding a long-term bond instead of a series of short-term bonds. That added return protects investors against the increased uncertainty and price volatility of locking their money up over time. The 10-year US government bond yield minus the average expected federal funds rate over the next 10 years. Conceptually, the “term premium” – which has risen sharply – is a nebulous “catchall” for a variety of different forces unexplained by monetary policy (e.g., supply, inflation, real growth, expected volatility).
NBER Recession: A significant decline in economic activity spread across the economy, lasting more than a few months, as officially designated by theNational Bureau of Economic Research. It is determined by analyzing factors like gross domestic product, income and employment.
Disclosures
The views expressed are for informational and educational purposes only and are subject to change without notice.
This material is not intended as, and should not be interpreted as, individualized investment advice or a recommendation to buy, sell, or hold any security, sector, industry, or investment strategy.
References to specific companies, securities, sectors, or industries are for illustrative purposes only and should not be construed as investment recommendations.
Investing involves risk, including the possible loss of principal. Investments in a specific industry or sector may involve greater risk and volatility than more diversified investments.
Past performance is not indicative of future results. No investment strategy can guarantee a profit or protect against loss.
Forward-looking statements, including views about future demand, pricing, supply, or industry cycles, are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially.
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In general, stock values fluctuate, sometimes widely, in response to activities specific to the companies as well as broad market, economic and political conditions. Stock investing involves risks, including fluctuating prices and loss of principal. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. (135-LPL) International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. (93-LPL)
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. (122-LPL)
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. (28-LPL)
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. (26-LPL)
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This is for educational / general purposes only, does not constitute investment, tax or legal advice and should not be relied on as such. This is not to be construed as an offer to buy or sell any financial instruments. Any strategies discussed are not intended to be relied upon as the sole factor in making an investment decision for any individual. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. These comments should not be construed as recommendations but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations. In addition, forward-looking statements, including index targets or market scenarios, are hypothetical in nature, reflect current views and assumptions and are subject to change based on market and economic conditions and are not guarantees of future performance. This is a hypothetical example and is not representative of any specific investment. Your results may vary. (88-LPL) Scenario outcomes are illustrative and not predictive. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly. (102-LPL)
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Publication Date: October 2, 2026
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