Liz Ann Sonders — Beyond The Mag 7: Positioning For Earnings Peaking and Yields Rising

2:53 The setup — recording into a down tape, and yields are the story

• Taped Tuesday morning US eastern time with futures lower. The US 10-year is up to ~4.8% and the 30-year close to 5.3% — "big levels relative to anything in the last month or anything in the last decade."
• Yields are rising globally, not just in the US.

3:46 Not surprised stocks are holding — this is normalization, and the damage is sub-index

• Measured against nominal GDP growth or the level of inflation, yields are "not only just about where they should be, but arguably… probably have more upside." She'd rather have normal yields than the post-GFC/post-pandemic financial repression that took the 10-year to 0.5%.
• The impact is there, just beneath the index: utilities and real estate are the worst performers of the last two months, and the money has rotated into energy "for obvious reasons" and into financials.

5:44 What would count as "disorderly": 4.75 → 5%, the MOVE index, and speed

• Levels matter for psychology, not economics. 4.75% was the first psychological marker (they're at 4.80 as they tape); 5% is the next round number.
• The real triggers are the MOVE index (the bond market's VIX, "relatively calm" so far) turning up, or simply moving "very very quickly" from 4.8 through 5%. Orderly is what has kept equity volatility contained.

8:07 The regime change — great moderation out, temperamental era back in

• Great moderation (late 1990s → the 2022 inflation spike): moderate and non-volatile inflation, falling rates, massive globalization (China into the WTO in 2001). Bond yields keyed off growth, so yields and stock prices were positively correlated — "sort of nirvana."
• Temperamental era (mid-to-late 1960s → late 1990s): yields keyed off inflation; shorter cycles, more frequent recessions, and yields and stock prices moving in opposite directions — which means bond prices and stock prices move together. "We're back now in an environment that I think looks more like" that.
• Consequence: 60/40 owes its simplicity to the great moderation's inverse price relationship. That crutch is gone — but access to non-correlated asset classes has been democratized, so individual investors are better placed than they were in the 1970s.

11:41 Bessent's doubled buybacks treat the symptom, not the disease

• Buying back the long end is "normal in the sense that they were already doing this" — Bessent just doubled it. But it's aimed at the symptom: the disease is "fiscal profligacy and runaway deficits and runaway debt" and investors demanding more compensation to finance it.
• It also cuts against Kevin Warsh's Fed, which wants to shrink the balance sheet and let the long end do some of the tightening for it — Treasury and the Fed working at odds.
• Second force: a wall of AI-related corporate issuance, "a shiny new object in the corporate bond market," pulling investment-grade buyers away from Treasuries.
• And the Fed can only do so much when the inflation is supply-side — energy and tariffs both are.

17:09 Will the authorities blink? Warsh's credentials and the Jackson Hole speech

• She's known Warsh 23 years: always on the hawkish end, and she does not worry about a "give up of those inflation fighting credentials" despite the sock-puppet worries during confirmation.
• At Jackson Hole he re-anchored the 2% target and core PCE as the mandate, said inflation is too high and not falling fast enough, and opened with a reference to "two different kind of hikes" — "more than a subliminal message."
• Political pressure is overrated as a mechanism: "the FOMC is a committee. It's not a chair" — seven people move the lever, and the other governors and voting members are a "cacophony."

19:58 Best guess: a 25bp hike in September

• Both labor and inflation data matter, "but the burden of proof is more on the inflation side." It would take something really significant on the labor side to pull the Fed away from a hiking bias — which is what the market has priced for September.
• Whether the curve keeps steepening depends on how active Treasury decides to be: "the short answer and the honest answer is, I don't know."

20:56 Escalator or elevator — the speed of a hiking cycle is what equities price

• Average one-year equity return after the start of a hiking cycle: about +4.5% — below the normal annual average.
• Fast hiking cycles: about −4% over the subsequent year. Slow cycles: more than +10%. "Are they going to take the escalator or are they going to take the elevator has historically been a key determinant."

22:03 The only real fix is to grow your way out — mid-to-high single-digit nominal growth

• Nobody publishes forward nominal growth estimates, but you need mid-to-high single digits to support the backdrop and the yield/stock relationship.
• The debt math: economic growth has to run faster than both inflation and debt growth to start chipping away at the problem. "We're not there" — and if inflation keeps creeping higher, real growth is subpar.
• Earnings growth is "set to ease from just the blistering pace that we saw in second quarter" as base effects turn against it.

24:21 "Rotation is the new momentum trade"

• She is not less constructive; she expects a market defined by "pretty rapid fire rotations."
• Why: the post-COVID cycle is a series of rolling expansions and rolling recessions at the sector level rather than one aggregate boom-bust — goods boomed then went into recession while services carried the economy.
• Base case is that this persists, barring a black swan, a major credit crunch, or a Treasury market that becomes unanchored from what the Fed and Treasury can contain.

27:19 Mega-cap tech keeps delivering — but there's no infinity sign

• Nvidia reported "late last week" and "they do keep delivering"; it's the bellwether for the whole AI movement. Broadcom reports tomorrow — "less of a bellwether than Nvidia."
• The Nvidias, Microns and Broadcoms keep producing the capex-spend numbers the market wants, "but it's hard to extrapolate that with an infinity sign. And at some point there's going to be some sort of miss."

28:30 Better-or-worse beats good-or-bad — and Samsung is the poster child

• Her 40-year maxim: "better or worse often matters more than good or bad." A growth rate falling from 60% to 30% is still phenomenal — but it's the inflection point, the rate of change, the direction of travel that moves stocks.
• Samsung beat the sell-side consensus on revenue and earnings but undershot the buy-side whisper number, landed between the two, and the stock was routed.
• Because Samsung and SK Hynix are such large KOSPI weights, the Korean market drew down ~40% (since largely recovered). Expect the next step to be more individual-stock dislocation and dispersion — not necessarily as soon as Q3 reporting.

29:57 The "Neural 9" and contribution-to-return — Micron 3rd, Tesla 503rd

• She tracks the Mag 7 plus Micron and Broadcom as the "Neural 9," posted daily on her X feed.
• The right lens is contribution to return — price performance multiplied by cap size — not price performance alone.
• On that measure Micron is the third-best contributor to S&P returns this year while Tesla is the 503rd: "almost the best to the worst in an array of nine stocks." Dispersion is already here, and the money hunting AI has spread out — the Russell 2000 has double the S&P's YTD return.

32:16 The concentration problem moved from market cap to earnings

• For calendar 2026 vs 2025 S&P earnings growth: Nvidia alone is 18%, Micron another 14% — "one third of all S&P expected earnings growth in 2026 is a function of two companies."
• The top 10 earnings-growth contributors — which bring in Chevron and Exxon at roughly #9 and #10 — are two-thirds of index earnings growth.
• A high-profile miss therefore hurts twice: the psychology, and mathematically a ratcheting-down of estimates. Offsetting positive: 10 of 11 sectors saw an improving earnings profile in Q2 — "just not meaty enough when you do the math for a cap weighted index." Market-cap concentration has eased; earnings-growth concentration has not.

35:35 Valuation: 22× → 19× forward, and zero correlation with the next year

• The denominator has been rising faster than the numerator, so the forward P/E is down from ~22× earlier in the year to ~19× (source-dependent — FactSet vs LSEG IBES). "That's not so bad," though inflation that isn't falling caps multiple upside.
• She looks at forward and trailing P/E, Shiller's cyclically adjusted P/E, Tobin's Q, the Fed model, equity risk premiums, the Buffett model and the rule of 20 — and there is zero correlation between forward P/E and subsequent one-year S&P performance. "The dots are all over the map."
• Valuation is an indicator of sentiment, not a timing tool — "there's no good timing tool but valuation is definitely not one of them."

38:19 Energy the best sector, the interest-sensitives the laggards

• Energy is "by far the best performing sector this year" — roughly double the tech sector — but goes unnoticed because it is only ~3.5% of the index, too small to stop the S&P chopping around.
• The laggards are the interest-sensitive segments: utilities and real estate, hit as yields rose.

39:18 Rotation is the release valve — the index fell 9%, the average member 25.5%

• The S&P never even hit a 10% correction this year: max drawdown of 9% and change in the post-Iran-war period. But average the individual max drawdowns across all 504 members and you get −25.5%.
• Nasdaq: −13% at the index level, but the average member is −45% year-to-date.
• That's how excesses get eased — valuation, sentiment, too-high earnings bars, macro narrative changes — one group at a time. "I think we would all choose to have this experience versus the S&P in the aggregate dropping by 25% all at once."

41:36 Sector ratings plus a factor overlay

• Expect continued bouts of exit from mega-cap tech, then money coming back in around earnings season for the eye-popping numbers — the buy-the-dip mentality is intact.
• Schwab uses a favorable-to-unfavorable scale rather than overweight/underweight, deliberately subtler. Favorable: industrials, materials, financials (cyclical bias) plus healthcare on valuation. Less favorable: utilities and real estate.
• The bigger idea is a factor overlay, not a replacement: growth factors (rising forward estimates, margin stability, positive earnings surprises), value factors (P/E, price/book, price/sales) and balance-sheet factors (strong free cash flow, high interest coverage). Factors have shown "more consistency in outperformance and underperformance" than sectors, which are "much more monolithic" — and dispersion within sectors is what a factor screen sorts out.

43:56 Midterms — the worst year of the four-year cycle

• The market does care: the midterm year is the worst of the four-year cycle on average, with volatility picking up around the summer and the lead-in, then a tendency to rally afterwards (with air quotes around "tend").
• Schwab's Washington team under Mike Townsend puts the odds at ~75% the House turns and 40–45% the Senate turns.
• Consequences: little chance of unwinding the one-big-beautiful-bill or the 2017 tax cuts, so no imminent tax-policy shock — but investigations pick up and fewer executive orders get made. "If say the House does turn… I would say what rock have you been living under?"

46:26 The wealth effect — record household equity exposure and the 2000–01 precedent

• "We've never seen a higher share of household assets invested in the equity market" (Fed data). Historically, exposure at all-time highs implies subsequent 10-year equity returns on the lower end.
• The carry-through into the economy is probably greater than in the late-1990s internet bubble. Her read of 2001: the recession happened because of the equity bust — no major tightening, no credit crunch, no plumbing failure, just a bubble bursting and the wealth effect filtering through.
• And it's circular / chicken-and-egg: a lasting equity decline feeds the economy, and a weaker economy feeds back into equities more than in past cycles where the two could disconnect. Something "we all should worry about" without any sense of when.

50:40 Not less constructive — just be mindful: concentration, diversification, portfolio-based rebalancing

• Asked directly whether she's less constructive than in the last three-to-five years: "No. I think we have to be maybe a bit more mindful of the risks right now."
• The disciplines that let you keep participating without undue risk: be mindful of concentration, and diversify across and within asset classes.
• Portfolio-based rebalancing instead of calendar-based: institutional programs rebalance the last week of a quarter, or semiannually, or at year end. Let the actual portfolio tell you when to trim what has run and add to what has lagged — anchored to a strategic asset allocation that fits your horizon, income needs, and the fact that financial and emotional risk tolerance are "two entirely different things."
• Her CEO Rick Wurster's line stands: it's time in the market, not timing the market.

52:35 "Gamblers Blues" — investing is owning, gambling is hoping

• Her real worry is a gambling mentality among younger investors — sports betting, prediction markets, get-in/get-out trading, options activity. She and Kevin Gordon wrote Gamblers Blues in April; Schwab turned it into a commercial. "Almost a sort of a financial literacy crisis in the making."
• The distinction: "Investing is about owning. You are a participant in wealth creation… you're owning a stake in a company and its future cash flows." Gambling makes you a spectator — "gambling is about hoping, not about owning." Over any reasonably long period the odds favor the investor; in Vegas they never do.
• Froth markers: single-stock ETFs, leveraged and inverse products — "shades of 2021," the meme-stock and SPAC crazes. "That specifically is something I worry more about than some '08 crisis ahead of us."