To Inform:

Yesterday, we had the Chief Investment and Portfolio Strategist for iShares, Gargi Chaudhuri, in The Joseph Group’s office and we had a terrific discussion about the current state of the markets.

Our conversation covered a lot of ground, but I want to share two key questions we discussed:

With everything going on the world (war, oil prices, inflation), how has the U.S. stock market been hitting all-time highs?

With respect to political consultant James Carville, “it’s earnings, stupid.”

Filtering out all the noise and headlines, corporate earnings over the last few months have been spectacular. Two charts below help tell the story. The first chart shows the path of quarterly earnings over the past five quarters. It’s common for earnings estimates to drift sideways or lower, and then spike up as companies beat expectations, but the 1^st quarter of 2026 saw actual corporate earnings exceed expectations to a historically large degree.

Source: Bloomberg

The second chart further tells the story. Over the past four months profits for the MSCI All Country World Index have experienced their largest increase on record. Historically, we’ve only seen similar percentage increases when the economy is recovering from a recession, but today we are seeing earning skyrocket amid an ongoing expansion.

Source: Hamilton Lane

Here’s another interesting fact related to the surge in corporate earnings. On a P/E (price to earnings) basis, the U.S. stock market has gotten cheaper in recent months even as the market has gone up. How? Even though prices have risen, earnings have risen even faster, resulting in a lower P/E ratio.

Over the long term, earnings drive stock prices and the surge in earnings the past few months have been nothing short of spectacular.

Do rising 10-year government bond rates present a risk to the market?

Over the last few months, Strategas Research Partners has suggested a rate on the 10-year Treasury rate above 4.5% would “make them nervous” about the consequences for risky assets such as stocks. Why? Even though the Fed, which controls short term interest rates, gets most of the headlines, it’s the rate on longer-term bonds, such as the 10-year Treasury which influences things like mortgage rates. The higher the 10-year Treasury rate is, the higher mortgage rates are, which in turn can put pressure on the housing market and the broader economy.

The chart below shows the 10-year Treasury rate, and over the past several years, it has been range-bound, only briefly exceeding the 4.5% level. Earlier this week the rate was 4.47%, and as I type, the rate has moved up to 4.59%.

Source: Strategas Research Partners

I shared my concern with Gardi that higher for longer 10-year Treasury rates could present challenges for the markets, but it was a concern she largely dismissed. She shared she recently returned from an insurance industry conference and that there was “huge demand” for bonds at higher rates. She shared it was unlikely “rates would stay high or go much higher as buyers would step into the market, in turn pushing rates back down.” She believes any move above 4.5% in the 10-year rate would be short lived, much like episodes (which are hard to see in the chart above) in 2023, 2024, and early 2025. Higher rates may coincide with some short-term volatility (like we are seeing today) but are unlikely to derail the economy.

It was fun to see Gargi on Bloomberg TV on Wednesday and then in TJG’s Library on Thursday, and we are grateful to share her intellectual firepower with our clients.

It’s a month away, but I also want to plug our upcoming Portfolios and Pints event on June 17. I’ll have the opportunity to conduct a lively and entertaining interview with The Joseph Group’s Chief Investment Officer Alex Durbin and we will focus on how the current market environment is influencing decisions we are making for the portfolios we are privileged to manage for clients. We plan to make it fun – please come if you are able and please feel free to invite a friend!

Written by Travis Upton,  Partner and Chief Executive Officer