The Rally and Rising Rate Risk 10/8/26

Starbucks

• Josh Brown · Ritholtz Wealth ManagementBearish

  Starbucks, in year three of a failed turnaround, would fall about 20% if it pursued a Chipotle deal.

  Josh argues Starbucks is in year three of a turnaround where the stock has not done anything. He can't imagine shareholders reacting positively to Starbucks taking on another company's turnaround. He says both stocks will lose another 20% if they are seriously going to combine. He would need to see resolution of inflation and consumer traffic before being inclined to think Starbucks could make a deal.

  “I think both of these stocks will lose another 20% if they are seriously gonna go.”at 19:04

• Shannon Saccocia · Neuberger BermanBearish

  Starbucks is an aging brand with a long turnaround ahead, so a Chipotle combination is premature.

  Shannon contrasts Starbucks with Chipotle. Brian Niccol turned Chipotle around from safety problems and got growth back on pace. Starbucks is an aging global brand that needs a refresh, its traffic is down 15% from 2019, and its afternoon daypart needs optimizing. She says Starbucks needs a longer runway before it could digest another company that has hit speed bumps.

  “Starbucks is an aging global demographic challenge... they continue to have traffic that's down 15% from 2019, and they have an afternoon daypart that needs to be optimized.”at 19:55

• Jenny Harrington · Gilman Hill Asset ManagementBearish

  A Starbucks-Chipotle combination seems highly doubtful and could become a value-destroying deal.

  Jenny finds a Starbucks-Chipotle combination highly doubtful. She compares it to the AT&T and Time Warner merger, which a few years later looked like a bad idea. Her view is that it could turn out to be a value-destroying deal.

  “Seems highly doubtful to me. It feels like it has potential to be like an AT and T Time Warner, you know, where a few years later, it would just be like, oh, she was a bad idea.”at 20:58

VanEck BDC Income ETF

• Josh Brown · Ritholtz Wealth ManagementBearish

  BDC ETF hit a 2-3 year low as rates spiked, signaling private credit stress people overlook.

  Josh shows BIZD, a BDC ETF, which he says just printed a two or three year low as rates spiked. BDCs are private credit, which he says underpins a lot of economic spending. Investors look at HYG and JNK, see no defaults and tight spreads, and stay calm. Josh argues the focus should be on BDCs, where the stress is showing.

  “this ETF, which just printed, I think, a two or three year low yesterday as rates spiked... This is private credit. Like, this is what's underpinning a lot of the spending in the economy”at 12:29

Chipotle Mexican Grill

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• Josh Brown · Ritholtz Wealth ManagementBearish

  Chipotle, already a broken chart, would fall about 20% if pursued in a Starbucks deal.

  Josh looks at Chipotle's one-year chart and calls it a punch lasagna, meaning a weak pattern. He says both stocks would lose another 20% if a Starbucks deal is seriously pursued, and he is skeptical that a deal would be value-creating for shareholders.

  “I think both of these stocks will lose another 20% if they are seriously gonna go.”at 19:04

Microsoft

Across the shows: 2 speakers in other episodes, 2 bullish and 0 bearish calls, past 30 days

• Malcolm Ethridge · Capital Area Planning GroupBullish

  Investors were shortsighted to sell Microsoft; the OpenAI renegotiation unlocked Copilot enterprise value.

  Malcolm argues the OpenAI deal renegotiation was transformative. It let Microsoft consolidate Copilot into one cohesive product to sell to enterprise customers and underpin it with Anthropic, so users can pick between Claude and Codex. He says this unlocked value on the question of how Microsoft would integrate AI, and that investors who dumped shares over Copilot doubts were shortsighted.

  “I thought investors were being a little bit shortsighted when it came to Microsoft simply because them going back and renegotiating that deal with OpenAI”at 24:06

Energy Select Sector SPDR Fund

• Josh Brown · Ritholtz Wealth ManagementBullish

  Energy ETF XLE is up strongly this year and likely finishes higher; rally isn't done.

  Josh says crude is up 60% year to date and XLE is having its third-best year in 28 years. Historically, when XLE is up double digits into October, it finishes the year even higher in eight of ten years. He says the rally is not done, though it moves day to day with oil headlines. He also highlights refiners as big winners, with the energy rally driven by oil, not AI.

  “when you look at what happens when it's up double digits into October, eight out of out of 10 years, this thing finishes the year even higher. I don't think this rally's done.”at 27:48

Chevron

Across the shows: 1 speaker in other episodes, 0 bullish and 1 bearish calls, past 30 days

• Jenny Harrington · Gilman Hill Asset ManagementBullish

  Chevron's rally reflects AI-driven energy demand, including direct gas supply to Microsoft data centers.

  Jenny cites a JPMorgan Energy Conference where Chevron announced a partnership with Microsoft to supply natural gas directly to data centers. She argues almost every energy company is benefiting from AI-driven demand for energy of every kind, and that AI is powered by natural gas. She says Chevron is up in large part because of demand for all energy sources, so the XLE rally is AI-related rather than purely oil.

  “We want to announce that we just formed a partnership yesterday with Microsoft to supply their energy gas. Directly to their data center.”at 28:35

Williams-Sonoma

• Josh Brown · Ritholtz Wealth ManagementBullish

  Williams-Sonoma is an AI winner in a bombed-out sector, with its AI shopping assistants lifting order values.

  Consumers using AI on Williams-Sonoma's website are producing shopping carts that, in some cases, lead to orders about nine times larger than before. The brands use AI assistants, Otto for Pottery Barn and Olive for Williams-Sonoma, and customers build entire rooms on the site and order them. Brown calls this an AI winner in a retail sector that has been badly beaten down. He also argues the stock needs to get back above its prior highs on good volume before he would stay long.

  “the average shopping cart as a result of consumer use of AI on the Williams Sonoma website is leading in some cases to orders that are on average nine times higher than before.”at 35:14

Best Buy Co.

• Jenny Harrington · Gilman Hill Asset ManagementBullish

  Best Buy is a better pick than Williams-Sonoma: low leverage, a cheap valuation and a dividend.

  Harrington's fund bought Best Buy earlier this year, and the stock is up about 31% year to date. The thesis rested on low leverage, a trading multiple under 10 times earnings at purchase and a dividend yield above 5%. The stock now trades at about 12 times earnings, which she says is why she likes it a bit better than Williams-Sonoma, though she still likes the AI angle. She argues that money has crowded into obvious AI trades when companies like Best Buy, which she says have a similar AI story, are cheaper.

  “And the thought on Best Buy was low leverage. When I bought it, it was trading at under 10 times earnings. It had over 5% dividend yield, so the money was there. And it's still only at 12 times, and that's the reason I like it a bit better than William Sonoma”at 36:49

Delta Air Lines

Across the shows: 3 speakers in other episodes, 3 bullish and 0 bearish calls, past 30 days

• Josh Brown · Ritholtz Wealth ManagementBullish

  Delta is the best-run airline and will stay that way, so Brown is staying long through jet fuel price swings.

  Brown cites Delta's financial management, the highest consumer ratings, the best reviews and a strong on-time record. He says none of this changed during the quarter and doesn't expect it to change next quarter. He credits Delta's refinery business with helping it handle higher jet fuel prices, and says he is staying long ahead of earnings.

  “I think this is the best airline. So I know financially, they are the best at managing their business. I also know from a consumer perspective, they have the highest ratings, the best reviews, and they have a great on time record.”at 41:22

JetBlue Airways

• Jenny Harrington · Gilman Hill Asset ManagementBearish

  JetBlue is stuck in no man's land since the pandemic, with earnings far below pre-pandemic levels.

  After the pandemic JetBlue stopped being a discount carrier and was no longer a premium one, which Harrington says worked against it. Her fund has sold the stock. She suspects it can still get back to about $1 of earnings, versus roughly $2 before the pandemic, and says it may be worth buying again only if it gets cheap enough.

  “But the problem with JetBlue is, like, following the pandemic, they kind of ended up in no man's land. They were no longer a discount airline, and they were no longer a high end airline, and that really worked against them.”at 42:09

US stock market outlook

• Josh Brown · Ritholtz Wealth Management

  Good earnings won't rescue rate-heavy sectors; those stocks stay pressured even as the S&P can still climb.

  Josh expects this earnings season to be a season of haves and have-nots. Results will be good across the board, but good reports will not be enough to bail out the most interest-rate-heavy sectors. The worst-performing groups share rate sensitivity, either because they borrow heavily or because their equity appeal was the dividend, which is less attractive at high rates. He still sees the S&P possibly galloping higher into December, so the view is that rate-sensitive stocks lag, not that the whole market falls.

  “I do not think good, quote, unquote, good earnings reports are going to be enough to bail out the most interest rate heavy sectors in the market. I think those stocks will remain on the mat.”at 2:24

• Jenny Harrington · Gilman Hill Asset Management

  S&P 500 strength rests on record concentration in five megacaps, so the index masks broad weakness.

  Jenny argues that statements that large caps and the S&P are fine ignore concentration. Five companies, Apple, Amazon, Nvidia, Microsoft and one more, make up about 28% of the index, the most she has seen in history, so their returns drive the index. Citing a Morgan Stanley report, she notes 89% of S&P 500 stocks have had a 10% drawdown since June 1. Outside the megacaps the picture is much weaker than the index suggests.

  “there's five companies that are making up nearly 30%. I think it's about 28% of the of the index, and that is the most five stocks have ever made up in, you know, in history that I've seen.”at 5:57

• Josh Brown · Ritholtz Wealth Management

  Mag Seven earnings will more than offset geopolitical risk and rate volatility for the market.

  Josh says investors know the smoothing effect of Magnificent Seven earnings will be more than enough to offset the geopolitical turbulence. He points to elevated MOVE (bond volatility) and currency volatility, but reads the market as sweeping through them. He frames the outcome as either volatility eventually hurting stocks or rates calming and lifting stocks further, which implies he leans toward the second.

  “the smoothing effect of the mag seven earnings will be more than enough to offset all the geopolitical stuff that's ... playing havoc.”at 8:34

• Shannon Saccocia · Neuberger Berman

  Money should rotate to companies with strong balance sheets and free cash flow, including hyperscalers.

  Shannon expects a continued rotation back to names with strong balance sheets and strong free cash flow, and says it does not matter whether they have taken on a lot of debt. She argues hyperscalers can still drive earnings. Selectivity matters, so investors need to be in the right sub-industries, such as which financials to hold, rather than just the right sectors.

  “We think that there's gonna continue to be a rotation back to the names that have strong balance sheets, strong free cash flow. Doesn't matter if they've taken on a lot of debt.”at 9:30

• Josh Brown · Ritholtz Wealth Management

  Small caps lag under rates because they borrow more and are energy-intensive, making the broadening trade hard.

  Josh explains the Russell 2000 underperformance with the makeup of the index. Its companies have a higher propensity to borrow at prevailing rates, and many are small industrials that are more energy intensive. Combined with his view that the broadening trade is harder to sustain, this points to continued small-cap weakness while rates stay high.

  “Have a higher propensity for having to borrow at prevailing rates. That's number one. And number two, they might be more energy intensive.”at 16:49

• Shannon Saccocia · Neuberger Berman

  Her firm cut its overweight to small and mid caps, which look less attractive than large caps.

  Shannon says her firm was very overweight small and mid caps six months ago, then cut the position last quarter and recently announced a further cut to its long-term overweight. Perceived rate sensitivity and slimmer margins in the universe drive this, along with housing-linked earnings that she expects to keep suffering. She thinks earnings in large caps are more attractive even with strong economic growth and no concern about the long end.

  “We announced this week that we actually have cut our long term overweight to small and mid cap to... At Target. So we had been very overweight six months ago. We cut it last quarter.”at 17:20

US Treasuries & yields

• Shannon Saccocia · Neuberger Berman

  Bond yields at current levels look attractive; investors should add bonds despite the Fed hiking.

  After three years of strong equity returns, Shannon says bond yields at these levels are attractive, so investors worried about what is happening under the surface can pick up yield and allocate more to bonds. She argues the average hiking cycle is about 300 basis points, not 50 to 75, and she does not think a protracted hiking cycle will happen. If that is right, yields are probably attractive here.

  “bond yields at these levels are actually kind of attractive. And so there's really no reason if you're actually feeling concerned about what's happening underneath the surface that you can't potentially pick up some yields here and allocate a little bit more to bonds”at 9:30

• Jenny Harrington · Gilman Hill Asset Management

  Investors can lock in five-plus percent yields with little risk, and advisers should push clients to do so.

  Jenny says advisers should have the hard conversation with clients about moving into bonds. Even clients who know bonds have been hurt can shorten duration and buy bills. Her reasoning is that there is real return to be made, and investors may have a moment to lock in yields of five and change with no risk, which is a bullish view on yields.

  “You might have a moment in time where you can lock in five and change percent, right, with no risk.”at 15:55

Commercial real estate

• Shannon Saccocia · Neuberger Berman

  Real estate is being repriced for rates, and much of it still looks cheap.

  Shannon says the perception that real estate is trading off interest rates misses that a significant shift is already happening in how real estate is priced. Even if rates are 100 basis points higher than today, she thinks much of real estate still looks pretty cheap. This is a valuation argument that real estate is underpriced relative to its rate exposure.

  “There's actually, like, a significant amount of shift in terms of how real estate is being priced in the market, and a lot of it still looks pretty cheap.”at 11:22

Consumer & retail

• Jenny Harrington · Gilman Hill Asset Management

  Retail stocks need selection by company; the winners are winning and buying the sector broadly is no longer enough.

  Harrington points to large retail drawdowns this year: Lululemon down 56%, Nike down 46% and Tractor Supply down 35%. She says the environment is intense, the winners really win, and execution matters more than ever. She concludes that investors must be selective by industry and by company, and cannot just buy retailers as a group.

  “We're in such a weird period right now and such an intense period where the winners really win. Right? And execution matters more than ever that you need to be selective within industry. You can't even just buy retailers right now.”at 38:02