Why The S&P Just Hit A Record High — Despite Soaring Yields

NVIDIA

Across the shows: 11 speakers in other episodes, 10 bullish and 3 bearish calls, past 30 days

• John Mowrey · NFJ Investment GroupBullish

  Nvidia's valuation multiple is very reasonable; the chip-stock rerating is warranted.

  Semiconductor and AI names sold off after June, partly from technical selling when Russell indexes reconstituted and memory stocks with large weights were removed from value indexes. Semiconductor multiples are now among the lowest seen, and Nvidia's multiple is reasonable given its growth. Micron's stellar earnings show results keep coming through, so the rerating of tech stocks is warranted despite market doubts about the earnings.

  “now you've got some of the lowest multiples we've seen. If you look at the multiple you're paying for Nvidia, Ed, I think it's very reasonable.”at 9:26

US housing

• Robert Armstrong · Financial Times

  US housing is in a deep freeze, not a crash: rate lock-in keeps sales near 4 million a year.

  Homeowners who locked in mortgages at 2-3% in the zero-rate era will not move, so housing supply and liquidity fall as rates rise. Owners also resist selling at a loss, so prices hold while transactions collapse. Sales run at about 4 million a year, the same level as after the housing bubble burst, so it is a deep freeze rather than a crash. Renters and young buyers are left outside looking in.

  “So what happens as a result of that? Prices don't fall. Transactions do.”at 25:19

• Robert Armstrong · Financial Times

  The 30-year fixed mortgage is a subsidised policy choice that freezes housing when rates rise.

  The 30-year fixed-rate mortgage is uniquely American and is made possible by a semi-explicit government guarantee. Fannie Mae and Freddie Mac buy, bundle and sell mortgage bonds, which subsidises the product. Because of this, rising rates lock people into their homes rather than repricing the asset, so the market freezes. Armstrong calls this the policy the country has chosen, and notes there is no law requiring it.

  “But we do have this unique home finance system where mortgages like mine can be bundled into bonds, and those bonds have a semi explicit guarantee from the US government.”at 26:28

• Robert Armstrong · Financial Times

  Bipartisan zoning reform may slowly thaw housing supply, but quick fixes are hard to see.

  Housing is hard to build in the US because of zoning rules and land prices. A bipartisan law passed this summer gives localities an incentive to roll back zoning regulations, which NIMBYs have long controlled at the local level. Armstrong thinks people are becoming more aware of the problem, so supply could improve slowly, but he sees no quick fixes.

  “it feels like we're at a moment where some of the ice is thawing in that area.”at 30:24

• Robert Armstrong · Financial Times

  Home prices are very hard to push down; they stall and fall only in real terms via inflation.

  Prices are sticky. In the last housing bust, national prices fell only about 10-15% and then stalled, and became cheaper in real terms as inflation rose. With supply constrained and owners reluctant to sell at a loss, Armstrong sees few routes to nominal price declines beyond stability, with inflation bringing real prices down over time.

  “it's very very hard to get home prices to go down, and they can be kind of stable and inflation can bring them down in real terms.”at 31:39

AI infrastructure & data centers

• Ed Elson · Prof G Media

  Hyperscalers recycling revenue in a circle inflates AI earnings; the return on capex is unproven.

  Elson argues that a large part of the explosive earnings growth comes from big tech hyperscalers trading revenues and recycling them through the system. The capex is driving earnings, and the only reason firms spend is an expected return that has not yet appeared at the largest spenders. If the return underwhelms, spending could be cut sharply, reducing earnings growth and undermining sustainability. He asks whether the market has priced this in.

  “The concern that I think is valid, at least in my view, is this circular financing concern that we have these earnings that are moving in a circle.”at 10:38

• John Mowrey · NFJ Investment Group

  Circular financing is part of the ecosystem but a concern; independent demand must be proven.

  Mowrey agrees the circular financing concern is important and needs watching. He notes Amazon's gains from its Anthropic investment, which also buys Amazon's chips, as an example. Some circularity is expected when the largest companies drive the capex cycle and their customers buy from them. He says the real tests are independent third-party demand and whether the investments are funded by debt rather than operating cash flow. The return on the AI trade is the key open question.

  “The circular financing is something we've gotta pay very close attention to... the circular financing to some degree is part of the ecosystem.”at 11:29

• John Mowrey · NFJ Investment Group

  Compute demand is still outpacing supply; compute contract prices may reprice higher.

  Mowrey looks at the price and demand for compute and sees both pointing higher. He says the market is still pretty constrained, and that contract prices for compute may reprice higher. This supports his view that the AI build-out is not overbuilt yet and that the spending has strong demand behind it.

  “everything there points to that it's going higher and that actually contracts may reprice higher for compute ed.”at 14:28

US stock market outlook

• John Mowrey · NFJ Investment Group

  S&P earnings growth near 38% keeps the market resilient; stocks look cheaper despite record highs.

  Forward S&P earnings growth is near 38%, and the only other times earnings growth reached 30% or more were coming out of recessions (COVID, 2009, 2008). Despite the index hitting all-time highs, the market has gotten cheaper, at about 19 times forward earnings. Higher yields and oil are pushing the multiple down, which is textbook, but strong earnings are carrying the index to records and keeping it resilient.

  “I think the reason that we've seen such resiliency is that we've got forward earnings at nearly 38% for the S and P.”at 3:53

• John Mowrey · NFJ Investment Group

  The rally is broad, not narrow; small caps are spring-loaded with 27% earnings growth.

  Mowrey disputes the narrow-market narrative. Small caps and mid caps are up double digits this year, and refiners, industrial machinery and materials have performed strongly. He explains the recent small-cap pullback as tied to oil prices acting as a regressive tax and to rising rates hitting smaller firms harder, since they have more debt and less access to capital markets. With small-cap earnings growth at 27%, he sees them as spring-loaded.

  “I think there's a misconception in the market that this is a narrow trade, and I keep hearing people say that only a handful of stocks are holding the market up. I would take the opposite side of that.”at 5:48

AI bubble & tech valuations

• John Mowrey · NFJ Investment Group

  The AI trade may be a boom rather than a bubble, since earnings durability spans many sectors.

  Mowrey argues that earnings strength is not confined to AI and tech but spans sectors, which points to a broad boom rather than a narrow speculative bubble. He concedes that the AI capex cycle, roughly $900 billion from hyperscalers, drives much of it. He also says markets do create bubbles because firms must keep investing to stay competitive, so the risk is in overbuilding, not in the investment itself.

  “I might take the side that maybe we're mistaking a bubble for a boom.”at 5:40

Oil & fuels

• John Mowrey · NFJ Investment Group

  Lower oil would pull yields down quickly and let stocks rip; the upside risk is substantial.

  With bond yields above 5% and oil around $100, Mowrey sees both as drags on the market. If oil falls, interest rates should come off quickly and the market should rally. He says markets would be substantially higher if the Iran conflict had been resolved, and that the conflict's length is keeping a coiled spring underwater. Investors are offside because they are decomposing whether the AI trade is real, which could mean missing the upside move.

  “If you see oil prices move lower, interest rates should come off quickly and the market should rip.”at 15:10

US inflation

• John Mowrey · NFJ Investment Group

  CPI should roll over over the next year, giving the Fed room to ease rates.

  The two-year yield has pushed the Fed's hand, and CPI should roll over over the next twelve months. This is because of the mechanics of the calculation: inflation needs its rate of change to slow, not prices to fall, so even with oil elevated the year-over-year CPI should fall. That would let the Fed ease rates potentially within a year, which Mowrey sees as bullish for markets if earnings growth holds.

  “The CPI should roll over over the next twelve months, if nothing else, just because of the calculation.”at 15:51

US growth & recession risk

• Robert Armstrong · Financial Times

  AI spending has replaced housing as the economy's swing factor, keeping GDP growing.

  Housing used to drive normal business cycles because it is the biggest swing factor, shrinking the most and growing the most. The housing market has been frozen since rates rose, so housing has not been contributing to GDP, which would normally signal a late-cycle slowdown. AI has taken housing's place by providing the important incremental swing that keeps the economy growing. Without the AI boom, the absence of housing would be much more noticeable.

  “We have AI, which has sort of taken the place of housing in this cycle in that, you know, it is giving that important incremental swing to keep the economy growing.”at 29:01

Wealth, inequality & billionaires

• Ed Elson · Prof G Media

  Billionaire heirs buying media companies signals that wealth inequality has gone too far.

  Elson uses the Paramount and Warner Bros. Discovery deal as an example. David Ellison, son of Oracle founder Larry Ellison, now controls much of American legacy media, financed by his father and Gulf sovereign funds. He argues that the world is increasingly run by the children of billionaires, and that more than a third of billionaires became rich through inheritance. He says the buying of entire media companies by heirs shows that inequality has gone too far, though he does not say the individuals are bad people.

  “To me, that is a signal that wealth inequality has gone at least a step too far.”at 36:47