The midterms will fill the void between now and the start of earnings season, but they are not among the three things that at the moment, perhaps, are most influential in strengthening or hurting the attractiveness of stocks. We’d say those three things are the bond market, earnings, and oil (or maybe to get more granular, diesel). In September the 10-year Treasury yield reached its highest level since 2007; Brent crude, the global oil benchmark, topped $105 a barrel; and analysts have raised the bar for third-quarter profits.
Wall Street strategists specialize in carefully nuanced forecasts, but we are not really in the forecasting game. Rather, we ask, What’s driving the current picture, and what would change it? and work to build portfolios that can hold up no matter which strategist turns out to be right this time.
As Morgan Stanley’s policy strategists note, tariffs, trade, deregulation, immigration and export controls are under the purview of the White House, and despite the outsized presence of Donald Trump in political and media consciousness, he’s not actually directly on the ballot. Prediction markets currently price a Democratic sweep of Congress at about 61%, a split Congress at 31% and a Republican hold at 7%.
A surprise result may tempt investors to treat it as a signal for 2028, but that would be far from a done deal. Midterm results typically haven’t produced outsized winners or losers over the following three to six months, despite all the media attention they garner when they’re happening.
The voting does matter for the AI build-out, but that’s mostly something happening in state capitols. The levers that make or break a data center are held by governors, legislatures and, in ten states, elected utility commissioners. In key races, the debate is now whether to pause expansion or impose various conditions. A slower build-out would actually confirm our view that AI’s binding constraint is now physical, and favor existing compute capacity and on-site power — those who have it, those who supply it, and those who build its infrastructure.
Local ballot results could rewrite a few terms of the data-center build-out in certain locations, but the trend as a whole is a Goliath. Capacity that gets NIMBYed in one place will migrate elsewhere, and we note that the fickle nature of the public sentiment that has recently seemed to turn so sour could turn back in the other direction just as easily: we won’t hazard a guess about whether public sentiment is being shaped with political goals in mind. Keep your eyes on the larger trend and the larger technological story.
One: The Bond Market
The MOVE index, the bond market’s fear gauge, tracks how much options traders expect Treasury yields to swing. It jumped roughly a third in September, to levels last seen in March, as the 10-year US Treasury bond yield climbed from 4.79% to 5.24% and the Fed raised rates for the first time since July 2023. On the other hand, the VIX, its counterpart for stocks, has barely stirred out of a drowsiness seemingly inspired by the relentless upward march of earnings.
So far the climb reflects solid growth, costlier oil, and a Fed intent on taming inflation. Really, that’s not a climb to be feared. The kind to fear is disorderly: yields rising because buyers step back (the kind of thing that since the GFC has tended to evoke policymaker panic and intervention). Still, even orderly yields’ rise does gradually change the valuation arithmetic. The S&P 500 trades at 19.2 times the profits analysts expect over the next twelve months. Turned upside down, that is an “earnings yield” of about 5.2% — roughly what a 10-year Treasury now pays.
When a Treasury pays about what stocks earn, growth has to do all the work, so attention to the growth gets sharper and the questions about it get more pointed.
Two: The Earnings Bar
“Strong” earnings are graded on a curve, and right now, that curve is set by yields and oil. Analysts usually lower the bar as a quarter progresses, trimming estimates by 2% to 2.5% on average. This time they raised it: FactSet’s consensus now calls for third-quarter S&P 500 profits to rise 29.1% from a year earlier.
Beating that is necessary, but might not be not sufficient. With bonds this competitive, the market also needs (1) companies’ own forecasts to hold up into 2027, when analysts expect growth to slow to about 15%; (2) margins (outside the energy sector) to hold up despite pricier fuel; and (3) growth expanding beyond the two engines doing much of the lifting, chipmakers and suppliers to the AI buildout, and an oil windfall.
The higher yields and oil climb, the higher the bar that earnings must clear for Mr Market to assess them as sufficiently “strong.”
Three: Oil and the Middle East
Brent was up about 19% in September, yet U.S. crude trades well below it: much of the oil Americans consume is produced at home and never has to pass through Hormuz or make the long voyage from the Middle East or other distant suppliers.
As we write, crude through Hormuz is back near prewar volume on a seven-day basis, about 13.5 million barrels per day. That recovery rests on U.S.-escorted dark shuttles and includes Saudi barrels rerouted from the damaged East-West Pipeline, while refined products are still under a fifth of normal and tanker attacks continue. With inventories and the SPR nearly drawn down and no diplomatic settlement, Brent holds well above $100, and prompt physical barrels are priced well above deferred futures.
The first risk is escalation: The Wall Street Journal reports, citing U.S. officials, that the President expects to resume bombing Iran after the election. (Take any such pronouncement with an abundance of salt, of course: if he really meant it, why would he broadcast it?)
The second risk is duration: a seven-month war keeps a premium in oil that seeps into inflation expectations, and policymakers dread this seepage, since “expectations” are so hard to manage and shift.
The third risk is physical scarcity, and Europe is most exposed. Its gas storage is about 71% full, roughly 16 points below the five-year norm for late September, and Washington is weighing curbs on American diesel exports, which recently supplied about half of Europe’s diesel imports. A cold winter would test both; perhaps Europe needs to get religion and start praying for a mild winter.
This letter is general commentary — the wide-angle view. It is not a portfolio. What we do for the families we work with is the opposite of “wide-angle”: we make portfolios built around one household’s circumstances, taxes, timelines, and appetite for exactly the kind of volatility described above. We keep that roster of clients deliberately small, because that sort of attention doesn’t scale. If you’d like to talk about what it would look like for you, Aubrey Ford will make the time.
The Wobble
The loop also runs in reverse: a reopened strait would ease oil, inflation and yields. The calendar helps, too. Morgan Stanley notes that seasonal headwinds typically fade in October, and that stocks have averaged roughly 22% in the twelve months after a midterm and 19% in a president’s third year.
We would treat a midterm-driven dip (or a typical, seasonal October wobble) as an opportunity to put your buy list to work… provided the bond market stays orderly, the oil shock stops short of physical shortage, and earnings clear a bar the market considers fair. Resilience comes from owning what pays off on different turns of the loop: energy producers if oil stays high, power generation and grid equipment whichever way the NIMBY contests go, and businesses that fund growth from their own cash rather than at today’s rates.
A dip born at the ballot box is an opportunity; one born in the bond market or the Strait of Hormuz probably deserves a more cautious response.
A Brief Cybersecurity Note
We, like most of our clients, grew up in a pre-internet age. Some recent incidents made us put together a helpful cheat sheet that can be kept by the computer for helping navigate the dangers posed by phishing emails and other similar scams.
Americans reported nearly $21 billion in losses to the FBI’s Internet Crime Complaint Center last year, including $7.7 billion reported by people over 60. Phishing, a fake email or text posing as someone you trust, was among the most frequently reported complaints.
The encouraging news is that the best defenses are low-tech, and we have put them on a one-page cheat sheet you can download below. Three rules do most of the work.
- Slow down: urgency is the scammer’s main tool. Check by phone, at a number you already have, before sending money or changing bank details, even when the request seems to come from someone you know, including us. Voices can now be cloned, so the call should be one you place, not one you take. And a request for gift cards is always a scam.
- Never share a password or a sign-in code. If a code arrives that you didn’t ask for, tap Deny; someone may already have your password.
- Signs of a virus or ransomware, which locks your files until you pay, include a demand for payment, files that won’t open or a cursor moving on its own. If you see them, get the computer offline, leave it switched on (shutting down can erase clues), touch nothing else, and call for help from your phone.
Scammers prefer that you act in haste; stopping, thinking, and making a call to a number you already have can take away their edge.
Thanks for listening; we welcome your calls and questions.
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If you are an investment advisory client of GIM who is receiving this newsletter, please note that the fact that a general recommendation is made of a particular security, commodity, or investment area to its newsletter subscribers does not mean that investment is suitable for you or should be purchased by you. For example, GIM may already have purchased such securities on your behalf or purchased securities in the same industry (and an increase in the position for you may represent too much concentration in one security or industry), or GIM may believe the investment is not suitable for you based on your risk tolerance or other factors. If you have questions about the recommendations in this newsletter in relation to your account at GIM, please contact Tony Danaher, Rudi von Abele, or Aubrey Ford.
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