Things that go bump in the night

The market's recent resilience despite rising Treasury yields above 5.2% suggests stronger nominal growth, not inflation fears. This marks a regime shift from the post-financial crisis era of sub-4% nominal growth. The AI infrastructure buildout is a key driver, but also increases debt issuance, putting upward pressure on yields.

While the pace of yield increases is concerning, the Fed's expected one to two more modest hikes into Q1 2027 should extend the economic cycle. Elevated energy prices remain a legitimate worry, but sufficient inventories, consumer resilience, and base effects should mitigate severe impacts. We see AI development continuing, with some moderation potentially easing inflation and improving free cash flow.

Midterm elections pose little threat, historically preceding strong equity performance. The primary risks to our bullish thesis are AI failing to deliver on productivity gains or a major credit event, neither of which appears imminent. We maintain a target of 10,000 for the S&P 500 by year-end 2027.