Growth Expectations Are Probably Too High | Andy Constan on Post-Midterms Macro View, Bond Supply Issue, and QRA (Quarterly Refunding Announcement)

Andy Constan · Damped Spring Advisors

Bonds are suitable for portfolios again after a five-year bear market, but he is trimming his long position.

Yields hit post-COVID highs in real rates, term premium and nominal rates for the long end, and bonds were unattractive when 10-year yields were near 65bp. From late September and aggressively in early October, yields rose enough that bonds again diversify stocks: they fall less when growth weakens. He turned strongly long in early October. He is now flattening his maximum long position because the economy is still strong and inflation is above target, the Fed is on a hiking cycle, and yields have already dropped off the highs. Bonds stay fine for a portfolio but look less interesting to a speculative trader.

“And what I observed in late September and then aggressively in early October was that bonds have finally become once again suitable for an investment portfolio.”at 7:45

Andy Constan · Damped Spring Advisors

Bessent's expanded long-bond buybacks are a political effort to suppress long-term yields.

Since August 18, Treasury Secretary Bessent raised the long-term buyback program from roughly $64bn a year of 20- and 30-year purchases to a $192bn annual pace. He talks about being the house, but Andy calls it simply a political decision to suppress long-term rates. He criticises this same behaviour in Yellen, and says Bessent has been doing it since August. Andy watched the quarterly refunding announcement to see whether the policy would be followed through.

“Treasury Secretary Bessent has been very aggressive manipulating the long end of the Treasury curve through his actions since August 18”at 9:49

Andy Constan · Damped Spring Advisors

Net government and corporate bond supply has flipped savings from glut to deficit, lifting term premium.

For about 20 years there was a savings glut, with more savings than assets, reinforced by corporate buybacks that cut share counts. Government dissaving from a 6% deficit, a Treasury that keeps issuing, and rising corporate issuance, including Oracle's debt deal in September 2025, flipped this to a deficit of savings. The result is a rising risk premium: every asset falls a little and bond yields rise. Growth expectations and risk premium drove yields over the past six to nine months.

“combination of dissaving government issuance and corporate issuance has flipped that to a deficit of savings from a surplus of savings from a glut to somewhat rare.”at 19:30

Andy Constan · Damped Spring Advisors

Quarterly refunding was in line with expectations; a non-event that leaves yields free to move.

Coupon issuance is unchanged from the pace of the last two and a half years. The 20- and 30-year buyback was kept at the increased $192bn pace, which leaves net 20- and 30-year supply of about $252bn a year, well below prior years. That lower supply suppresses rates. Bessent tested whether he could hold yields down (rates are well above where he started in August) and neither doubled down nor folded; he just checked. Rates are therefore free to follow the macro economy and private-sector supply and demand.

“The answer is pretty much status quo. Pretty much in line with expectations.”at 1:00:06

Andy Constan · Damped Spring Advisors

Treasury will likely cut supply or buy back more if 10-year yields hit 6% and stocks fall.

Bessent has shown his hand that he is willing to suppress long-end rates, starting with the August 18 move, which has not been withdrawn. The government regulates and administers the long end, controlling issuance and the buyback. If 10-year yields rose to 6% and the stock market fell, Andy expects Bessent to reduce supply or buy back more. He just does not need to act at current yield levels.

“You can count on him reducing supply or buying back more.”at 1:01:37

Andy Constan · Damped Spring Advisors

Neutral on stocks; index range-bound with low realized volatility, so options bets have failed.

He has been neutral on stocks for many months. Over the last three months he held both calls and puts, and both expired worthless because the S&P 500 and major indexes went sideways with very low realized volatility. Even a huge day for the Nasdaq realized only about 17 vol. In this environment the only way to make money is to short options, which he calls a dangerous game. He does not trade sectors.

“I've been pretty neutral on stocks. My big problem this last three months is I've had calls, I've had puts, and both of them have expired worthless because the market's just gone sideways.”at 26:11

Andy Constan · Damped Spring Advisors

Net buybacks are shrinking from about 2% of GDP toward zero, a major drop in equity demand.

His firm tracks net share count changes from all sources, including buybacks, issuance, IPOs and employee share grants. For decades net share reduction ran at about 2% of GDP. That is projected to fall to 0% of GDP next year, a shift of about $700bn in net stock supply and demand that he thinks matters. He sees no sign of it reversing soon. Issuers are being punished, with Google, Intel, NBIS and Cerberus cited as examples, which makes companies hesitant to raise more equity.

“share count reduction has been running at around two percent of GDP, which is significant. That has shifted. I don't know if we'll get there this year, but we're projected to get there next year to 0% of GDP.”at 32:16

Andy Constan · Damped Spring Advisors

Earnings expectations are too high; aggregate stocks can't deliver the growth already priced in.

Stock prices reflect expected nominal earnings growth. The issuance needed to achieve the growth that is priced in may not clear the market at current prices, and the growth implied for the overall economy looks unattainable. Almost all stocks that matter are priced to win, and not all of them can win, so you cannot own all of them. Picking winners can still pay, but in aggregate the market is in an earnings-expectation bubble. Andy also argues that rotation within equities is not a net outflow from stocks, so it does not change the aggregate picture.

“To me, that's almost impossible at this stage. That's why I say there's an earnings expectation bubble.”at 43:52

Andy Constan · Damped Spring Advisors

Gridlock rules out fiscal expansion; existing fiscal policy is a slight drag on growth.

Major fiscal expansion needed Republicans holding both chambers and Trump pushing Senate Republicans to nuke the filibuster. Neither happened, and now nothing can pass without appealing to Democrats, whom Republicans will mostly reject. He expects gridlock, with bipartisan deficit legislation only after a market or economic crisis. Fiscal policy has moved from expansionary in the first 18 months of the big bill to contractionary. Government spending net of taxes is a drag on growth going forward, and gridlock means little variance around that.

“Now there's no way that we get anything that can be nothing passes fiscally without lots of things that appeal to the democrats.”at 2:35

Andy Constan · Damped Spring Advisors

Gridlock is unlikely to be healthy for a market that has leaned on fiscal expansion since 2020.

Markets are said to like gridlock, and the 1994 case showed that. But Andy does not think more gridlock is healthy now, because the market depends somewhat on fiscal expansion, which has been large since 2020. He pushes back on the idea that a political outcome changes the macro picture.

“I don't think yet that more gridlock is going to necessarily be particularly healthy for a market that depends a little bit on fiscal expansion over the last few years.”at 49:28

Andy Constan · Damped Spring Advisors

Very strong real growth has pushed real yields higher, since investors prefer equity to lending.

The main driver of the bond selloff has been a sustained run of strong real growth, while inflation has sat half to one and a half points above target without being the story. Much of the AI capex boom leaks abroad through imports. With strong growth, investors would rather invest in equity than lend, so lenders need a higher real yield to finance debt. Strong growth is the primary reason yields are high, and supply is secondary.

“So I say all those things and say, that's what's been happening. Very strong growth. And with very strong growth, you have very strong real yields.”at 14:45

Andy Constan · Damped Spring Advisors

Growth expectations are too high; expects a disappointment over the next three to six months.

Growth expectations are pretty high and have been the principal driver of stocks and bonds. They got marked down over the last three to six weeks. Bonds rallied across the board while semiconductors had already been trashed for a long time and hyperscalers had been big issuers, so this is a broad growth slowdown rather than an AI-specific one. He is not forecasting recession; a slowdown could still deliver what is expected. If it becomes a recession, positions are the same as if that was the destination.

“my bet today is that we're going to see a period of, you know, three to six over the next three to six months. We're going to see a disappointment relative to growth expectations.”at 25:24

Andy Constan · Damped Spring Advisors

US consumer strength comes from wealth and low-rate leverage, not wages, so spending is uneven but resilient.

Consumption, about 67-68% of GDP, has been strong, and that strength is not from wage gains. It comes from wealth, investment earnings and interest income. Low interest rates let consumers lever up, and those who were under-levered had cheap debt with a low burden, leaving room to borrow. He acknowledges the distribution is very uneven, but the aggregate saving-funded consumption has been a strong support for the economy.

“it's come from, not from wage gains. It's come from wealth. It's come from investment earnings. It's come from interest earnings.”at 13:57

Andy Constan · Damped Spring Advisors

Hyperscalers now fund AI capex through public bond and equity issuance, not internal cash flow.

Over the last 18 months the major capex spenders have used up free cash flow, accumulated cash and cancelled buybacks. Now all that is left is public issuance, with a hyperscaler issuing about $25bn of benchmark corporate bonds every day and equity sales from companies such as Meta and Oracle. That new supply is what is pushing up yields and the risk premium.

“So every day you get a 25,000,000,000 benchmark corporate bond issuance by a hyperscaler.”at 18:33

Andy Constan · Damped Spring Advisors

Bond selloffs since COVID reversed as policymakers eased; a similar V-top is possible now.

Every time since COVID that bond yields sold off like they just did, they V-topped. Policymakers then eased rapidly, whether for the SVB episode, the end of hiking cycles or dovish guidance, and they stepped in whenever the bond market sold off or issuance policy changed. That rescued the bond market and then equities, and stimulated growth and inflation. A similar V-top could derail his growth-slowdown call. He is watching for it closely.

“every other time since COVID that bond yields did what they've done over the last few weeks, they've V topped and policymakers have eased rapidly”at 27:59

Andy Constan · Damped Spring Advisors

No bubble has popped; AI earnings-expectations bubble persists and could last six more months.

The aggregate Nasdaq is near all-time highs, which is not what a popping bubble looks like. A speculative frenzy in storage and semiconductors, with 100% out-of-the-money calls trading at 100 vol, has calmed and some of those stocks have gone sideways. Earnings expectations have not degraded and remain extraordinarily high, and he calls the AI earnings expectations parabolic for about six months with no pop. He thinks it could last another six months and expand significantly from here.

“I look at the aggregate NASDAQ and say there has been no bubble popped. This is not what a popping bubble looks like. Not even close.”at 36:35

Andy Constan · Damped Spring Advisors

Mark-ups on cross-holdings are not recurring earnings and should not get a multiple.

Agreeing with Jack, Andy says a company holding a stake in another company gets gains that are not recurring and should not be counted as earnings. He compares it to digital treasury companies that treat bitcoin price moves as earnings and apply a multiple to them.

“If you have a company that has a cross holding, that's not recurring and earnings.”at 45:59

Andy Constan · Damped Spring Advisors

Midterms don't matter: no post-midterm seasonality; only substantive policy changes move markets.

Andy has examined every modern-era midterm (the years since Nixon took the US off gold) and finds no seasonality. The sample is too small to conclude anything, and markets rise about 80% of the time anyway. What matters is a substantive policy change that gets implemented. The 2017 corporate tax cut made stocks about 10% more valuable immediately, while 1994 gridlock brought a market trend that Greenspan's cuts supported. Nothing from the election changes the macro picture yet.

“Midterms don't matter. There is no seasonality. There is none.”at 47:21

Andy Constan · Damped Spring Advisors

Chip and infrastructure sellers face a glut and slowdown as overspenders cut compute build-out.

The capex overspenders are unable to build, so there is less capacity coming online, which could raise compute prices. It is unclear whether that beats more volume. Compute buyers pay by selling AI tokens, and if token prices cannot be passed through, there is no demand for compute. Companies whose whole existence depends on selling chips and infrastructure will sell fewer chips at lower prices, which is a glut and a slowdown. Andy calls this an obvious trait that everyone knows.

“Those guys, they definitely are going to be experiencing the slowdown. There's no doubt about it because they're going to have a glut of chips.”at 52:18

Andy Constan · Damped Spring Advisors

Falling oil prices are good for bonds, stocks and gold, though one day of moves shouldn't be over-read.

Oil fell sharply on the day, and Andy sees that as positive for bonds, stocks and gold, which all played out that day. He cautions against reading much into 24 hours of price action, because the underlying Middle East question (whether the war is over) is unresolved.

“But the price of oil fell a lot. And that to me is good for bonds and good for stocks and good for gold and good for lots of things.”at 52:44

Andy Constan · Damped Spring Advisors

Nothing has changed for Iran, so the war may not be over; questions whether the US has surrendered.

Andy does not see any change in the Iranians' position, which suggests the conflict is not necessarily over. On the US side, the midterm loss is attributed partly to the war and prices, so he asks whether the US has surrendered and what that would mean. He is starting to pay attention to this question. Given that uncertainty, he advises not to read much into the last 24 hours of price moves.

“What's changed for them? Nothing.”at 53:13

Andy Constan · Damped Spring Advisors

AI compute is a fantastic productivity driver; today's selloff is just a bump in its ramp.

Andy has worked with some form of compute to generate productivity for forty years, and this version is ramping up in ways everyone can imagine. He does not think the AI trade is done, the productivity and value of tokens is not zero, and these are the greatest things in the world. He expects bumps along the way and says the market is in the middle of one.

“Do I think the productivity and value of tokens is zero? No, I think these are the greatest things in the world.”at 53:39