The stock market keeps climbing toward and now reaching record highs, while some of the economic signals around us seem to be telling a very different story. Today, the S&P 500 closed at a record 7,818.93, while the Nasdaq also reached a record high. The Dow gained nearly 0.5%. At the same time, the yield on the 10-year Treasury remained around 5.27%, the 30-year yield was above 5.6%, and oil was still hovering near $100 a barrel. Somehow, the response from investors is Buy stocks and I just don't get it.
The explanation being offered is relatively straightforward. Oil prices have eased. Treasury yields pulled back from recent highs. Investors are expecting strong third-quarter corporate earnings and artificial intelligence continues to fuel enormous optimism about future corporate profits.
I understand the argument. If inflation pressures ease, Treasury yields fall and corporate earnings remain strong, stocks can certainly go higher. Here's where I struggle this isn't necessarily the economy most Americans are experiencing. The stock market isn't the economy. This distinction is becoming increasingly important.
The S&P 500 represents some of the largest and most profitable companies in the world. It does not represent the financial condition of the average American household. A multinational technology company benefiting from billions of dollars in AI investment can have spectacular earnings growth while consumers are simultaneously struggling with housing costs, food prices, insurance premiums, utilities and borrowing costs. Those two things can happen at the same time and I think that's exactly what we're seeing. The market is increasingly rewarding companies based on their expected future earnings, particularly companies connected to AI. Meanwhile, the real economy is dealing with something else entirely.
Look at the bond market.This is where the disconnect becomes even more difficult to ignore. The 30-year Treasury yield recently reached 5.702%, its highest level since 2002, before pulling back to roughly 5.63%. The 10-year yield also reached a 24-year high before easing. These aren't insignificant numbers. Long-term interest rates affect mortgages, corporate borrowing, construction, infrastructure investment and countless other parts of the economy. Yet equity investors appear willing to look past much of that.
I'm short some so I think my rational brain is somewhat bias but still this stock market pisses me off!