“Maybe I’m takin’ me too many chances
With no net at all
Maybe I’ll teach you at least
That you’ve got to be free when you fall
Watch close now
Are you watching me now?
I’m gonna need you later
When you’re not around
But I can take it
Don’t look down”
– (From “Watch Closely Now”, by Kris Kristofferson, from the 1976 version of “A Star Is Born”)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
Geopolitics, midterm elections, the economy, inflation, the price of oil – there certainly is no shortage of uncertainty, everywhere.
But two things are seemingly constant right now – both bond yields and the stock market are going up. That is not normally the case – their movements are usually somewhat inversely related.
So, what is happening and what does it mean for investors? Let’s dive in.
Current State of the Market
First, let’s examine the unusual market condition we’re in. Since October of 2025 both the S&P 500 index and the US 10-year Treasury rate have moved steadily upward – an unusual trend in comparison to their historical relationship.
Source: Ycharts, 5-year data as of September 24, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
The following chart shows the historically “more normal” inverse relationship between interest rates and equity prices – until approximately 2010.
Since then, equity prices have generally risen regardless of what interest rates did. But keep in mind that interest rates were essentially pegged at zero from 2010 – 2020, so there were no “rates rising / rates falling” trends during that period.
Source: The Daily Shot, as of September 25, 2026. This chart is for illustration purposes only and does not represent investment advice. You cannot invest in an index, and past performance is no guarantee of future results.
One result of this is an increase in the correlation between stocks and bonds, meaning bonds are not currently hedging equity risk as effectively as usual.
Remember that correlations can run between +1 and -1, with correlations greater than zero suggesting that two assets tend to move in the same direction (i.e., are hedging each other less effectively).
Consider the current correlation between the S&P 500 index and the US 10-year Treasury bond – it is fairly strongly positive.
Source: St. Louis Fed (FRED), through September 24, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
The US 5-year Treasury bond is also providing less diversification benefit than in the past, and in fact is currently more correlated to equities than the 10-year Treasury.
Source: Apollo, as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
And investment grade corporate bonds are not much better in terms of delivering diversification to equity risk.
Source: Advisorpedia and Lincoln Financial, as of June 10, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
What this means is that the diversification aspects of the traditional “60/40” stock/bond portfolio are not as strong as they normally are.
Source: The Financial Times and The Daily Shot, as of September 1, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
The rise in both equity and bond markets is not a uniquely US phenomenon – it is truly global.
Source: Ycharts, 12-month data through September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Source: Yardeni Research, data as of September 29, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Bond Market Characteristics and Investment Implications
Other aspects of both the bond and equity markets are worth examining. The yield curve has both risen and flattened (a “bear flattener” in market parlance) over the past twelve months.
Source: Eaton Vance “The BEAT” report, Q3 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Source: The Daily Shot, data as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Source: Ycharts, 12-month data as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Sources: The Daily Shot and Bank of America Global Research, as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
At the same time, credit spreads remain tight by historical standards, though we are witnessing some widening of the spreads demanded for the massive amounts of AI-related hyperscaler debt being issued.
Source: Ycharts, 10-year data as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Source: Apollo, as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Sources: The Daily Shot, Bloomberg, and JP Morgan Asset Management, as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Sources for the two previous charts: The Daily Shot and the Financial Times, as of September 28, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
There are several potential investment implications resulting from the current state of the bond market.
- There is income back in fixed income again.
After years in the wilderness during the “ZIRP” (Zero Interest Rate Policy) era, bond investors can now generate real income again (i.e., positive income net of inflation). Given the high valuations in the equity market, the bond market may actually be looking relatively attractive again.
Source: John Authers and Bloomberg, as of September 28, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Sources: The Daily Shot and Goldman Sachs, as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
- Yield seekers may be able to simplify their lives.
For the past several years, investors seeking yield needed to take on some extra level of risk in order to do so – either take on duration or credit risk in the public bond markets, or else access the private credit market.
We remain constructive on the private credit space (see our blog on this topic), and have been consistent in our view that, while coupons are generally safe, the total return potential in the public markets remains muted.
Despite tight credit spreads, real interest rates are higher than they have been in years, so yield seekers can now generate legitimate yields in the public markets without taking excessive credit or duration risk.
Source: Apollo, as of September 25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Another simple but seemingly forgotten tool is the straightforward bond ladder. In today’s market environment, investors can build a 10-year bond ladder that has the potential to generate real yield without taking on excessive duration or credit risk.
Furthermore, municipal bonds are trading at attractive valuations relative to Treasuries, meaning this may be an opportune time for tax-sensitive investors to examine potential municipal bond ladders.
Source: Invesco and the Daily Shot, as of September 28, 2026. You cannot invest in an index, and past performance is no guarantee of future results. For context, the historical average of the 20-30 year AAA-rated Municipals / Treasuries ratio is approximately 70% – 85%.
The following hypothetical AAA-rated national municipal bond ladder would yield approximately 3.6% on a blended basis, translating to a tax-equivalent yield of approximately 5.3% (based on specific tax assumptions).
Sources: Interpreted and extrapolated data from Hennion & Walsh and Raymond James, as of September 2026. You cannot invest in an index, and past performance is no guarantee of future results. This chart is for illustration purposes only and does not represent investment advice. Actual results may differ significantly based on each investor’s specific situation. Investors should seek professional financial advice before investing.
- An intelligent “barbell” approach of public and private credit may generate attractive current yields.
For investors who can access private credit and can accept the relative illiquidity of the space, we still believe a “barbell” approach of matching private and investment grade corporate credit can generate an attractive yield profile for investors.
The negative media attention given to private credit is, we believe, somewhat overblown and investors should not shy away from the space, with the caveat (as always) that the quality of the underlying asset manager is critical.
If we use index numbers as a proxy, a hypothetical portfolio consisting of 50% investment-grade corporate bonds and 50% middle market direct lending private credit currently has an attractive yield potential.
Sources: ICE Bank of America and Cliffwater, as of September 2026. You cannot invest in an index, and past performance is no guarantee of future results. This is a hypothetical example used for illustration purposes only and does not represent investment advice. Real results may differ significantly for individual investors. Direct Lending is typically on a floating rate basis and so yields will vary over time. Furthermore, realized returns may be lower than the indicated yield once realized losses are factored in. Investors should seek professional financial advice before investing.
Equity Market Characteristics and Investment Implications
Investors have enjoyed a remarkable equity rally for most of the past several years, and we believe this has the potential to continue, with some caveats.
The growth in the price of a stock has three primary drivers: dividend growth, earnings growth, and multiple expansion (or contraction).
What is interesting about the recent market rally is that it has been driven primarily by extraordinary earnings growth (see our recent blog on this topic).
Sources: S&P, Russell, First Trust Advisors, and the Carson Group, through Q2, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
This phenomenon has had an interesting result. Remember that the P/E ratio of a stock is a way of measuring how much an investor is willing to pay for a dollar of earnings.
In the current market environment, because of robust earnings, the “valuations” of the market, as measured by the P/E ratio, have fallen, making stocks look not as expensive as they were several months ago, especially the mega-cap tech stocks (referred to in the chart below as the “Magnificent-7”).
Source: Yardeni Research, data as of September 22-29, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
So, does this mean the stock market has become a “screaming buy”?
Well, maybe, but not so fast.
First, despite the P/E declines illustrated above, equities are still relatively expensive by historical standards.
Second, another way of looking at declining P/E ratios is that investors are deciding they don’t want to pay as much for a dollar of earnings as they used to.
One way to evaluate this is by looking at the so-called “PEG” ratio, which is the P/E ratio of a stock divided by its future expected earnings growth.
A declining PEG ratio suggests that the denominator – the expected earnings growth rate – is growing faster than the numerator P/E ratio. That is, valuation is being driven increasingly by earnings growth, investors are increasingly unwilling to pay up for the next marginal dollar of earnings, or a combination of both.
That is, it may be a signal that the market is peaking – not necessarily indicating a downturn, but perhaps a slowing of the upward trend.
In the following chart, note that historical “bear” markets tend to loosely coincide with a declining PEG ratio.
Source: Yardeni Research, data as of September 17, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Still another consideration is the relative concentration of the stock market – most of the recent returns have been driven by the mega-cap tech stocks, or the tech sector more generally. That is, the market remains very “narrow”, so a bet on the US market is, essentially, a bet on tech stocks, at least for now.
Source of the previous two charts: Yardeni Research, data as of September 17-25, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
This chart shows that only 15% of industry groups are currently trading above their most recent 10-week averages…
Sources: Hi Mount Research and The Daily Shot, September 23, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
…while this chart illustrates that the 52-week market breadth of the S&P 500 index (the number of stocks advancing versus the number of stocks declining) has fallen to its second lowest level in twenty years, beaten only by the “dot-com” crash of 2000.
Source: Goldman Sachs and The Daily Shot, as of September 28, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
As with the bond market, there are several potential investment implications resulting from the current state of the equity market.
- Earnings are strong and the market rally may continue but proceed with caution.
The decline in market valuations may lead some investors into believing that the current markets are not expensive, but they are, at least by historical standards. It is true that (a) earnings are robust and are expected to remain so for at least the next several quarters, and (b) market momentum and investor sentiment can keep markets elevated well beyond fundamentals – but eventually fundamentals always matter. A declining market PEG ratio may suggest a growing sense of investor fatigue.
- We are probably entering a Fed rate hike cycle. No need to fear.
As we write this, we don’t know yet if the recent Fed rate hike is a “one and done” event, but the current market positioning is that we have entered into a rate hiking cycle, with at least 2-3 more rate hikes expected over the next twelve months or so.
Source: The Atlanta Fed “Market Probability Tracker,” as of September 25, 2026. This is an estimate and subject to change as additional data come in.
But history suggests that, while markets may initially react negatively to the beginning of a rate hike cycle, over longer time periods the market adjusts to the “new normal” and performs however underlying conditions dictate.
Sources: LPL, BlackRock, and Goldman Sachs, as of September 2026. You cannot invest in an index, and past performance is no guarantee of future results.
- Beware of market concentration and indexing – now is a favorable environment for diversification and, perhaps, active management.
As we wrote in a recent blog, after years of “riding the beta wave” where index investing into US large cap stocks was really the only thing investors needed to do, we believe we have entered a new market regime.
As we’ve already discussed in this blog, bonds are currently not providing the same level of their historical diversification benefit.
Given the tech concentration of the US large cap market, index investing is either going to work very well or work very poorly – if the mega-cap tech stocks continue their dominance, their overweight percentage in the market capitalization of the S&P 500 index will continue to drive positive performance.
On the other hand, if the mega-caps “sneeze” the whole index will catch a “cold.” We have been consistent in our strong conviction that investors should be diversifying their equity exposure both across asset classes globally and across risk factors, with an anchor on the quality factor.
Furthermore, after laying dormant for years, we believe that alternative or “diversifying” strategies – long/short equity, global macro, event arbitrage, trend-following managed futures, market neutral, and so forth – will regain importance in helping investors realize more consistency in their portfolio performance as we enter a market regime characterized by higher volatility in both the equity and bond markets.
Active management is difficult to do well consistently, and so we have less conviction about active versus passive investing. The catalyst in favor of active management will be if the AI-related tech frenzy begins to fade and investors begin to search for more attractively valued sectors and asset classes.
We don’t know if that will happen, so we currently recommend an intelligent mix of active and passive, focusing our use of active managers in those less efficient asset classes where, historically, stock picking has been shown to have a higher potential to add value.
Summary and Interpretation
We seem to have entered an interesting market regime where historical relationships have – for now – broken down and traditional bond and equity markets have both attractive opportunities and potentially worrisome challenges.
We strongly believe it is very difficult to outguess the market, and so we maintain our long-standing investment philosophy:
- Global diversification across asset classes and risk factors
- The intelligent use of both passive and active investment strategies to optimize performance, fees, and taxes.
- The prudent use of alternative and private market investments to improve diversification, performance consistency, and potentially improve the overall risk/return profile of the portfolio
- A focus on tax minimization, mitigation, or deferral for taxable investors
- A disciplined investment approach and a strategic, long-term investment horizon.
As always, we welcome your questions and feedback.