Asbury Wealth Partners

10/12/2026

Observations & Insights – October 12, 2026

All-Time Highs
A strong start to the week lifted the S&P 500 and the NASDAQ to record highs on Tuesday. Neither index extended its record as the week progressed, but both finished around 1% higher overall, as did the Dow.

Key Points
• Stocks reached new all-time highs as the bull market approaches its fourth anniversary.
• Third-quarter earnings season kicks off this week with major banks reporting, providing an important test of corporate earnings growth and elevated market expectations.
• Attractive bond yields offer investors a compelling alternative to stocks, putting additional pressure on equity valuations.
• Political uncertainty, higher interest rates and inflation could trigger a correction, but pullbacks are a normal part of bull markets.
• We believe AI-driven productivity gains could extend the earnings cycle, while moderating inflation and interest rates could provide another catalyst for higher stock prices eventually.

Observations: Earnings Season on Deck
In the wake of recent bond market volatility, yields of 10-year and 30-year U.S. Treasuries were slightly lower overall for the week but remained near their highest levels in more than two decades. At Friday's close, the 10-year yield was 5.24%; the 30-year was 5.60%. The 2-year Treasury fell to 4.79%, down from 4.84% the previous week.

Wall Street analysts maintained high expectations as major U.S. banks prepared to open quarterly earnings season. As of Friday, analysts surveyed by FactSet were forecasting an average third-quarter earnings growth rate of 29.6% for companies in the S&P 500. Such an outcome would mark the third consecutive quarter of earnings growth exceeding 25%.

Oil traded in a relatively narrow range for the second week in a row, in a marked shift from the price volatility seen since Middle East tensions escalated in March and April. On Friday afternoon, U.S. crude was trading around $91.50 per barrel, up fractionally from its price a week earlier. As recently as mid-September, oil was trading as high as $105; in early April, it traded as high as $115.

Wednesday’s release of minutes from the latest U.S. Federal Reserve meeting showed that policymakers anticipate possibly raising interest rates again before year end. However, it was unclear how soon such a raise might come. At its meeting in mid-September, the Fed raised its benchmark rate for the first time since 2023. Its next policy meeting ends on October 28.

A monthly gauge of U.S. consumer sentiment fell to the lowest level in five months amid persistent worries about inflation. The University of Michigan reported on Friday that its Index of Consumer Sentiment fell to a preliminary October reading of 46.3, down from a final September reading of 48.1 and 51.7 in August. Despite the decline, sentiment remains above the record low of 44.8 set in May 2026.

A U.S. small-cap stock benchmark underperformed for the week, extending a recent run of lagging results for the Russell 2000 Index amid concerns about elevated interest rates. At Friday’s close, the Russell 2000 was down a cumulative 5.7% over the past five weeks, versus a 1.0% gain over that period for a U.S. large-cap index.

A Consumer Price Index report scheduled for release on Wednesday will provide a major data point for the U.S. Federal Reserve ahead of its policy meeting late this month. The most recent CPI report released in September showed inflation at a 3.4% annual rate in August, unchanged from the previous month and still well above the Fed’s 2.0% target.
Source: John Hancock Investments, “Weekly Market Recap,” October 9, 2026

Insights: Is This Bull Market Stronger Than Investors Think?
The stock market continues to surprise investors. Despite stubborn inflation, higher interest rates, geopolitical uncertainty and concerns about government borrowing, stocks have continued reaching new highs. The current bull market turns four years old this month, and investors are understandably questioning how much longer it can continue.

We have remained constructive on stocks, largely because corporate earnings have continued growing despite a challenging economic environment. However, I believe the more interesting question is whether investors are underestimating how much further earnings can grow, particularly as artificial intelligence and other technological advances begin delivering productivity improvements throughout the economy.

Four Years into the Bull Market
Bull markets do not come with expiration dates. The S&P 500 has gained approximately 120% since its October 2022 low. Although that is an impressive advance, history suggests that bull markets can continue well beyond their fourth anniversary.



The chart above puts the current bull market into historical perspective. While its age may make investors uncomfortable, four years is not necessarily a reason to expect the advance to end. More often, bull markets encounter trouble when economic growth deteriorates, corporate earnings weaken or financial conditions become sufficiently restrictive to undermine business activity.

Are We in an Earnings Bubble?
In a recent discussion on The Compound and Friends podcast, Fidelity's Jurrien Timmer raised an interesting question about whether investors may be experiencing an earnings bubble rather than a traditional valuation bubble. The concern is not simply that stock prices have risen too far, but that investors may be extrapolating unusually strong corporate earnings growth too far into the future.

That is a legitimate concern, particularly given the enormous investment in artificial intelligence. Eventually, companies will need to demonstrate that this spending produces an adequate return. However, I believe this earnings cycle may last longer than investors anticipate.

The initial phase of AI investment has primarily benefited semiconductor manufacturers, cloud computing providers and other infrastructure suppliers. The next phase could be much broader, as businesses throughout the economy begin using these technologies to reduce costs, improve efficiency and increase productivity.

If those benefits materialize, manufacturers, healthcare providers, financial institutions, retailers and service companies could all experience improved profitability. In my view, the longer-term opportunity is not limited to the companies building AI infrastructure but extends to the businesses that eventually put that technology to work.

Stocks Are Becoming Less Expensive
One of the most interesting developments in this bull market is that stock prices have continued rising while valuation multiples have declined. Normally, investors associate higher stock prices with more expensive valuations. However, that is not necessarily true when corporate earnings are growing faster than stock prices.

According to Carson Research, the S&P 500's forward price-to-earnings multiple declined from 22.2 at the end of 2025 to approximately 19.4 in early October. Meanwhile, forward earnings expectations increased substantially. Investors are effectively paying less for each dollar of expected corporate earnings, even though stock prices have risen.



The chart above illustrates how earnings growth has more than offset the downward pressure on valuations from higher interest rates. This is encouraging because it suggests that the market's advance has been supported by improving corporate fundamentals rather than simply investors becoming willing to pay increasingly expensive multiples.

That does not mean stocks are cheap. Valuations remain relatively elevated, and forward earnings estimates are expectations rather than guarantees. Nevertheless, the market has become less expensive relative to its anticipated earnings, despite reaching new highs.

Stocks Have Competition Again
Another important consideration is that bonds are once again offering attractive yields. With the 10-year Treasury yielding approximately 5.2% and the 30-year around 5.6%, investors can earn meaningful income from high-quality fixed-income securities without assuming the same risks associated with stocks.

For investors in higher tax brackets, municipal bonds can also be compelling. Depending on the investor's tax situation, high-yield municipal bonds may offer attractive taxable-equivalent income, although they carry additional credit and liquidity risks compared with Treasuries.

This competition for investment dollars helps explain why stock valuations have contracted. When investors can earn attractive yields from bonds, they become less willing to pay elevated multiples for corporate earnings.

Corrections Are Normal
I would not be surprised to see another market correction as we approach the midterm elections. Political uncertainty, concerns about potential tax increases at the state and federal levels, and the possibility of additional interest-rate increases could all contribute to volatility.

However, corrections are a normal part of investing and do not necessarily signal the end of a bull market. They can help reduce excessive speculation, bring valuations into better balance and create opportunities for long-term investors.

The more important question is whether a correction reflects deteriorating economic fundamentals or simply changing investor expectations. As long as corporate earnings remain healthy and the economy continues growing, I would be reluctant to interpret every pullback as evidence that the bull market has run its course.

What Could Take Stocks Higher?
While earnings growth has been the primary driver of the market, there is another potential source of support that has been largely absent recently: expanding valuation multiples.

Higher interest rates have made investors less willing to pay elevated prices for future corporate earnings. However, that relationship can work in both directions. If inflation begins to moderate and Treasury yields stabilize or decline, investors may once again become willing to pay higher multiples for those earnings.

A resolution to the war involving Iran could also improve the outlook. Lower energy prices could ease inflationary pressures, provide relief to consumers and businesses, and give the Federal Reserve greater flexibility in setting monetary policy.

If corporate earnings continue growing while inflation moderates and interest rates stabilize, stocks could benefit from both higher profits and expanding valuations. That combination would provide a more favorable backdrop than the one investors have navigated recently.

Final Thoughts
Four years into this bull market, there are legitimate reasons for caution. Interest rates remain elevated, inflation has been persistent and investors are questioning whether extraordinary corporate earnings growth can continue. Political uncertainty surrounding the midterm elections could also contribute to another correction.

Nevertheless, I believe the longer-term earnings outlook remains stronger than many investors appreciate. The enormous investment in artificial intelligence is still in its early stages, and the productivity benefits are only beginning to reach the broader economy. As businesses find ways to produce more efficiently, control costs and improve profit margins, earnings growth could continue well beyond the current investment cycle.

Stocks have already demonstrated that they can advance despite higher interest rates and declining valuation multiples. If inflation moderates, bond yields stabilize and geopolitical tensions ease, the market could eventually benefit from both continued earnings growth and expanding valuations.
That is why we remain constructive on the longer-term outlook. Corrections are an inevitable part of investing, but I believe the earnings and productivity runway supporting this bull market may be considerably longer than investors currently expect.

It is our aim at Asbury Wealth Partners that you find the market commentary we provide informative and useful. As our success grows mainly through referrals from our clients, we encourage you to share this weekly newsletter with your friends, family, and colleagues. If you are a client, we thank you for your business and your confidence. If you are not yet a client, we encourage you to contact us today and explore how our team may be able to add value to your unique financial situation.

Thank you,

Paul O'Hara, CFP®
[email protected]

Send a message to learn more

09/28/2026

Observations & Insights – September 28, 2026

Stocks Push Higher Despite Rising Yields
Borrowing costs continued to climb last week as declining bond prices pushed Treasury yields to levels not seen in nearly two decades. At Friday’s close, the yield of the 10-year U.S. Treasury finished at 5.16%, up from 5.01% the previous week. The 30-year yield was 5.49%, and the 2-year yield was 4.85%.

Key Points
• Stocks continue to rise despite higher Treasury yields, increased bond volatility and continued geopolitical uncertainty.
• Large-cap technology and AI-related stocks have regained market leadership, potentially reflecting investors' preference for strong earnings, cash flow and balance sheets.
• Higher interest rates are compressing P/E multiples but rising corporate earnings have so far been strong enough to offset much of that pressure.
• Investor positioning remains cautious, creating the potential for additional buying if underinvested investors and professional managers are forced to chase a rising market.
• A melt-up is not inevitable, but strong earnings, renewed Big Tech leadership and widespread skepticism create conditions that could support further gains.

Observations: Big Tech Regains Leadership
The NASDAQ climbed to a record high on Tuesday, eclipsing a previous peak reached in early June, before pulling back modestly on Wednesday. By Friday’s close, the NASDAQ finished 2.1% higher for the week; the S&P 500 and Dow posted gains of 1.2% and 0.3%, respectively.

An apparent easing of tensions in the Middle East conflict sent oil prices lower, with U.S. crude down to roughly $92 per barrel on Friday afternoon. As recently as September 15, oil traded as high as $106; the year-to-date peak came in early April, at $113.

Recent bond market volatility has extended beyond U.S. borders, with government debt yields in major developed markets climbing to multi-year highs amid concerns about inflation and interest rates. On Friday, yields for 10-year government bonds reached 5.36% in the United Kingdom, 3.60% in Germany, and 3.07% in Japan. In contrast, China’s 10-year debt was yielding 1.69%, down slightly for the week and far below yields in most other major economies.

For the second week in a row, a U.S. large-cap growth stock benchmark outperformed its value-oriented peer by a wide margin, chipping away at the value style’s still-sizable year-to-date performance leadership. The growth index finished 2.4% higher for the week, while its value counterpart was essentially flat.

The U.S. dollar extended its recent gains in global currency markets following the first U.S. interest rate increase in three years. As of Friday afternoon, the dollar was up 0.6% for the week against a basket of major foreign currencies and 2.3% above a recent low on September 9.

Inflation worries and the Fed’s latest interest rate hike continued to weigh on the U.S. housing market, as the average 30-year U.S. fixed-rate mortgage rate eclipsed 7.00%. Freddie Mac on Thursday reported that the previous week’s average had reached 7.03%, the highest since January 2025; a subsequent daily survey by Mortgage News Daily found that the average had climbed further to around 7.45% as of Friday, reflecting a further surge since the Freddie Mac survey.

A monthly labor market report due out on Friday will show whether August’s improvement in labor market conditions extended into September. August’s report showed a monthly gain of 162,000 jobs—roughly triple the number that most economists had forecast in the wake of weak figures in the previous months. August’s unemployment rate held steady at 4.1%.

Insights: Has Big Tech Become the New Safety Trade?
Something unusual is happening in the financial markets. Treasury yields have risen to their highest levels in nearly two decades, the Fed has resumed raising interest rates and geopolitical uncertainty remains elevated. Normally, that combination would be expected to push investors toward traditional safe-haven assets and away from stocks.

Instead, stocks have remained remarkably resilient. The NASDAQ gained 2.1% last week and reached another record high, while large-cap growth again significantly outperformed value. At the same time, the bond market has become increasingly volatile as investors adjust to higher rates, persistent inflation and uncertainty over future Fed policy.

That raises an interesting question: Has Big Tech become something of a safety trade?

When Bonds Are Not So Stable
Treasury bonds have traditionally provided investors with income and diversification during periods of stock-market stress. They can still play that role, particularly if economic weakness causes interest rates to fall. But an inflation-driven, rising-rate environment creates a different dynamic. When rates rise, existing bond prices fall, and longer-maturity bonds can experience surprisingly large price swings.

That does not make Treasury bonds unsafe. Investors who hold an individual Treasury to maturity still receive the promised principal and interest. But it does remind us that safe and stable are not necessarily the same thing, particularly when interest rates are rising.


Source: Charles Schwab

The chart above shows the MOVE Index, which is essentially the bond market’s version of the VIX, the widely followed measure of stock-market volatility. It measures expected volatility in Treasury yields across several maturities. Notice how bond-market volatility began rising this summer even as volatility in the stock market was declining. That divergence is noteworthy. Investors traditionally think of stocks as the volatile part of a portfolio and Treasuries as the stabilizer, but lately much of the uncertainty has been coming from the bond market itself.

Perhaps that helps explain some of what we are seeing in stocks.

Why Big Tech?
Money appears to be rotating back toward large-cap technology and AI-related companies.

At first glance, calling Big Tech a safety trade sounds contradictory. Technology stocks have traditionally been associated with growth and higher valuations. But today's largest technology companies have characteristics investors often seek when uncertainty rises; enormous earnings, substantial free cash flow, strong balance sheets and dominant competitive positions.

They are also generally less dependent on outside financing than smaller companies. When the cost of capital rises, the ability to fund investment internally becomes increasingly valuable. In that sense, Big Tech may offer investors an unusual combination of AI-driven growth and financial quality.

This does not mean Big Tech has somehow become a substitute for Treasury bonds. The risks are obviously very different. But when investors are uncertain about interest rates and economic growth, it is not difficult to understand why capital might gravitate toward some of the largest and most profitable companies in the world.

Earnings Are Winning the Tug-of-War
This brings us back to the question we have been discussing for several weeks: Why are stocks doing so well when interest rates are moving higher?

A 10-year Treasury yielding more than 5% creates real competition for stocks. Higher risk-free rates also reduce the present value of future corporate earnings, which should put downward pressure on P/E multiples. And that is happening. What has prevented lower multiples from translating into a falling stock market is the other side of the equation: earnings continue to rise.



The chart above shows the relationship between the S&P 500, expected corporate earnings and the valuation investors are willing to pay for those earnings. The important point is the divergence between earnings and valuation. Forward earnings have continued to climb while the market's P/E multiple has contracted. In other words, higher interest rates are having the effect we would expect on valuations; they simply have not been powerful enough to overwhelm earnings growth.

That is the tug-of-war taking place beneath the market. Higher rates are pulling valuations lower while rising corporate profits are pulling stock prices higher. So far, earnings are winning.

Are Investors Off-Sides?
There may also be another source of potential demand: investors themselves.

Goldman Sachs recently highlighted an unusual disconnect between strong stock market performance and increasingly cautious investor positioning. As positioning has declined, there may be more room for investors to increase equity exposure if the market continues higher.

That matters particularly for professional money managers. Many active managers reduced exposure to the largest technology companies as market leadership broadened earlier this year. If Big Tech continues outperforming, those managers risk falling behind their benchmarks and may eventually feel pressure to increase exposure.

The same dynamic applies to investors sitting in cash or waiting for a larger correction. As stocks continue rising, the question gradually changes from “What if I buy and the market falls?” to “What if I remain underinvested and the market keeps rising?”

That is one of the ingredients that can produce what is sometimes called a melt-up. It does not mean one is inevitable. But if investors are cautiously positioned and the companies driving the indexes continue producing strong earnings, rising prices can eventually force money back into the market. In other words, pessimism can become fuel for a rally.

Reasons to Remain Grounded
There are still plenty of reasons for caution. Treasury yields above 5% represent genuine competition for stocks. Oil and inflation remain risks, and the extraordinary amount of capital flowing into artificial intelligence deserves scrutiny.

Some of the financing arrangements surrounding AI also warrant attention. Vendor financing and increasingly complicated relationships among chipmakers, data-center operators and AI developers raise legitimate questions about whether every dollar being invested will ultimately generate an adequate return. A technological revolution and financial excess can exist at the same time.

But there is an important distinction between questioning whether some AI investment has become excessive and assuming that the earnings supporting today's largest technology companies are about to disappear. For now, profits continue to grow, and investors appear to be moving back toward companies with some of the strongest earnings and balance sheets in the market.

Final Thoughts
The most interesting development may simply be how many potential headwinds the market continues to absorb. Treasury yields are above 5%, bond volatility has increased, the Fed has raised rates and geopolitical uncertainty remains high. Yet stocks continue to rise, earnings remain strong and market leadership is shifting back toward large-cap technology. Big Tech may increasingly occupy an unusual position in this market: offering the growth associated with AI while also providing the earnings, cash flow and balance-sheet strength investors seek when uncertainty rises.

None of this eliminates the risks from higher rates, AI investment or elevated valuations. But with investor positioning still cautious and many professional managers underweight the companies leading the market, continued strength could force more money back into stocks. The irony is that the skepticism surrounding this rally may ultimately become one of the forces that keeps it going.

It is our aim at Asbury Wealth Partners that you find the market commentary we provide informative and useful. As our success grows mainly through referrals from our clients, we encourage you to share this weekly newsletter with your friends, family, and colleagues. If you are a client, we thank you for your business and your confidence. If you are not yet a client, we encourage you to contact us today and explore how our team may be able to add value to your unique financial situation.

Thank you,

Paul O'Hara, CFP®
[email protected]

Send a message to learn more

09/21/2026

Observations & Insights – September 21, 2026
A Big Thank You to all that attended our Cars & Coffee this past Saturday.

Markets Hunt for Direction
A modest rally on Thursday only partly offset mostly negative daily results for the rest of the week, and the S&P 500 on Friday closed with a fractional overall decline for the second week in a row. The Dow sustained a larger weekly loss of 1.6%, while the NASDAQ ended fractionally higher.

Key Points
• The Fed raised rates because inflation remains above target, but much of the recent inflation pressure is being driven by higher energy prices.
• Higher short-term rates can reduce demand, but they cannot directly solve a supply-driven energy shock.
• The Fed cannot produce oil, but the United States and other producers can increase supply over time, potentially relieving some of today's energy-driven inflation pressure.
• Oil prices may be one of the most important indicators to watch for where rates go next.
• The Treasury yield curve has normalized and steepened considerably, although long-term yields around 5% create greater competition for stocks and pressure P/E multiples.
• Corporate earnings remain strong, so we are lowering our year-end S&P 500 target from 8,250 to 7,800–8,000 primarily because of multiple compression, not weaker earnings expectations.
• Our longer-term outlook remains constructive, and we continue to target 10,000 on the S&P 500 by the end of the decade, supported by earnings growth and potential AI-driven productivity gains.

Observations: Fed Hikes as Oil Fuels Inflation Pressure
In a unanimous vote, the U.S. Federal Reserve raised its benchmark interest rate for the first time since 2023, and a series of hikes that came in response to the pandemic-era inflation spike. Wednesday’s Fed projections showed that 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year.

Wednesday’s Fed rate hike weighed on bond prices, sending yields of U.S. Treasuries modestly higher, with shorter duration bonds posting the steepest yield increases. At Friday’s close, the yield of the 2-year Treasury was 4.76%, up from 4.63% at the end of the previous week. The 10-year was up slightly for the week at 5.01% while the 30-year was at 5.33%, slightly lower.

Oil traded in a wide range, with U.S. crude peaking above $106 per barrel on Tuesday before slipping below $100 on Thursday and Friday. Oil was trading just below that threshold on Friday afternoon but nevertheless remained near a four-month high in the wake of recent price gains, largely driven by developments in the Middle East.

Japan’s central bank sought to counter recent inflationary trends by raising its benchmark interest rate to the highest level in more than three decades. The quarter-point hike to 1.25% was approved Friday on a 7-2 vote. The move was widely expected following recent weakness in the yen as well as similar policy tightening by the U.S. Federal Reserve and the European Central Bank.

In the wake of Wednesday’s Fed rate hike, the U.S. dollar rose to the highest level since late July, relative to a basket of major foreign currencies. As of Friday afternoon, the dollar was up 1.1% for the week. On a year-to-date basis, the dollar was up about 2.0%.

A U.S. large-cap growth stock benchmark outperformed its value-oriented peer by a wide margin, modestly eroding some of the value style’s year-to-date performance leadership. The growth index was up about 0.9% for the week, while its value counterpart was down 1.1%.

The effects of the Fed’s rate hike rippled through the U.S. housing market, as the average 30-year U.S. fixed-rate mortgage rate rose to the highest level since January 2025. The average for the weekly period ended Thursday was 6.95%, up from 6.76% the previous week, according to Freddie Mac. In January 2025, the average was as high as 7.04%.

Insights: Can the Fed Fix Inflation?
The Federal Reserve raised interest rates by a quarter percentage point last week, its first increase since 2023, taking the federal funds rate to 3.75%–4.00%. The decision was unanimous, and most policymakers indicated that at least one additional increase may be appropriate before year-end. The Fed's reasoning was straightforward: inflation remains too high, and policymakers want to bring it back toward their 2% target more quickly.

I understand the Fed's concern. What I am less convinced about is whether higher short-term interest rates are particularly effective against the type of inflation pressure we are experiencing today.

Oil Is Driving the Inflation Story
A significant portion of the recent resurgence in inflation pressure is coming from energy. The war with Iran and disruptions throughout the Middle East have pushed oil sharply higher. West Texas Intermediate (WTI) crude briefly traded above $105 per barrel last week before finishing Friday around $100.

The connection to inflation is fairly straightforward. Oil affects much more than what we pay at the gas pump. Energy costs are embedded throughout the economy—in transportation, agriculture, manufacturing, construction and the movement of nearly every physical product we consume. Diesel prices are particularly important because trucks, trains, farms and heavy equipment all depend upon it.

That makes today's inflation problem somewhat different from one caused primarily by excessive consumer demand. If consumers are spending too aggressively and the economy is overheating, higher interest rates can be an effective tool. Raising rates makes borrowing more expensive, discourages some spending and investment, and eventually reduces demand.

But much of today's renewed inflation pressure is coming from the supply side of the economy. War has disrupted the production and transportation of energy, including traffic through the Strait of Hormuz and Saudi Arabia's East-West pipeline. Those disruptions have constrained global supply and pushed energy prices higher.

The good news is that global energy supply is not fixed. While the Federal Reserve cannot produce another barrel of oil, the United States and other major producers can increase production over time. As the chart below illustrates, U.S. crude oil and natural gas production have been trending higher, and current forecasts call for additional production growth through 2027.



That additional production matters. Higher U.S. output, combined with additional supply from producers elsewhere in the world, can eventually offset some of the production lost to geopolitical disruptions. Supply cannot respond overnight, and the course of the war remains uncertain, but today's oil shortage does not have to become a permanent feature of the global economy. This is one reason I think oil prices may be one of the most important economic indicators to watch over the next several months.

The Fed Cannot Produce More Oil
The Federal Reserve has powerful tools, but producing another barrel of oil is not one of them.
Higher interest rates can make car loans more expensive. They can increase credit-card rates, push mortgage rates higher and cause businesses to reconsider new investments. If the Fed raises rates enough, it can eventually slow economic activity and reduce demand.

What higher rates cannot do is increase oil production, reopen disrupted shipping routes or repair damaged energy infrastructure.

That does not mean the Fed should simply ignore an energy shock. If higher energy prices persist long enough, they can spread into other parts of the economy and potentially become embedded in wages, services and inflation expectations. The Fed has a legitimate reason to prevent a temporary supply shock from becoming a more persistent inflation problem.

But there is a tradeoff. The primary way monetary policy can offset supply-driven inflation is by weakening demand elsewhere in the economy. The risk is that we slow otherwise healthy areas of the economy without directly addressing the source of the inflation.

That is why I believe the path of oil may ultimately tell us more about where inflation and interest rates are headed than another quarter-point increase in the federal funds rate.

Keep an Eye on Oil
Our expectation is that energy prices remain elevated as long as the war with Iran continues to materially disrupt global energy markets. There is obviously no way to know when or how the conflict will end, and the oil outlook remains unusually uncertain. But the underlying economics are relatively simple.

If the conflict de-escalates, shipping routes normalize and U.S. and global production continue to increase, more oil should reach the market. That should reduce the geopolitical risk premium currently embedded in energy prices and put downward pressure on oil. If oil prices fall, an important source of today's inflation pressure falls with them.

The reverse is also true. If the war persists, supply remains constrained and oil stays around $100 or moves higher, inflation is likely to remain stubborn. That would put additional pressure on the Fed to keep rates higher or raise them further, even though monetary policy cannot directly solve the underlying supply problem.

This is why I am reluctant to extrapolate today's inflation and interest-rate environment indefinitely. The underlying economy remains remarkably resilient. Even in announcing its rate increase, the Fed described economic activity as expanding at a solid pace, domestic spending as resilient, productivity growth as strong and capital investment as robust.

The immediate problem is inflation. The underlying economy does not appear to be the problem.

A More Normal Yield Curve
There is another development in the bond market that I think is important. Despite all the concern about higher interest rates, the shape of the Treasury yield curve has actually become considerably more normal.



A year ago, the curve was inverted across much of its maturity range, with short-term Treasury securities yielding more than intermediate-term bonds. Today, the curve is positively sloped across most maturities, with yields generally increasing as investors commit money for longer periods.

That is a much more normal relationship. Investors should generally demand additional compensation for lending money for longer periods because they assume greater inflation and interest-rate risk. A positively sloped curve can also create a healthier environment for traditional lending because financial institutions can fund themselves at shorter maturities and lend money farther out the curve.
There is, however, an important distinction between the shape of the yield curve and the level of interest rates. The shape looks increasingly normal. The level remains high.

With the 10-year Treasury around 5%, investors have a legitimate alternative to stocks. A higher risk-free rate also affects how much investors should reasonably be willing to pay for future corporate earnings. And that brings us to what I believe is the most important distinction in the current market.

Earnings Are Not the Problem
Corporate earnings continue to move higher.



The Yardeni Research chart above compares actual S&P 500 operating earnings with forward earnings, which represent analysts' expectations for the coming year. The important takeaway is not a specific earnings estimate. It is the direction. Forward earnings continue to rise rather than roll over. That matters because stock prices are ultimately a function of two major variables: how much companies earn and how much investors are willing to pay for those earnings.

Right now, earnings are doing their job. The pressure is coming from the second part of the equation.

When a 10-year Treasury yields around 5%, investors have an attractive risk-free alternative to stocks. All else being equal, that should reduce the P/E multiple investors are willing to pay for future corporate profits. This is the same relationship we discussed last week. Earnings can continue growing while P/E multiples contract. If earnings rise enough, stock prices can still advance even as valuations become less expensive. That is essentially what I think the market is dealing with today: strong earnings competing with higher interest rates.

Adjusting Our Year-End Expectations
Earlier this year, I established a year-end S&P 500 target of 8,250. That target was based in part on an expectation that interest rates would stabilize rather than continue moving materially higher. The earnings side of that forecast has not caused me to become less constructive. What has changed is the interest-rate environment and, therefore, the valuation multiple I think is reasonable.

With the 10-year Treasury around 5%, the yield curve steepening and the Fed indicating that additional tightening may be necessary, I think some additional multiple compression is reasonable. As a result, we are lowering our year-end S&P 500 target from 8,250 to a range of 7,800–8,000.

I do not want to put too much emphasis on the target itself. Whether the S&P 500 finishes December at 7,800, 8,000 or somewhere else is less important than understanding why our assumptions have changed. We are not lowering our earnings expectations. We are lowering the multiple we think investors should be willing to pay for those earnings while long-term interest rates remain elevated. That is an important distinction.

The Longer-Term Story Has Not Changed
We are also maintaining our longer-term target of 10,000 on the S&P 500 by the end of the decade.

The reason is relatively straightforward. Over longer periods, earnings growth matters far more than any individual Fed meeting or quarter-point change in interest rates. If American companies continue growing profits and the productivity improvements we expect from artificial intelligence begin showing up throughout the economy, there is considerable room for earnings to expand between now and the end of the decade.

Artificial intelligence could also eventually become part of the inflation solution. The enormous AI infrastructure buildout is consuming capital today, but the purpose of that investment is to allow businesses to produce more with fewer resources. If AI meaningfully improves productivity, companies should eventually be able to produce more goods and services at lower incremental cost. That would be inherently disinflationary.

There will be volatility along the way. Higher rates can pressure valuations, AI-related stocks can experience significant corrections, and not every dollar being invested in AI will generate an attractive return. None of those possibilities invalidate the broader productivity story.

Final Thoughts
The Fed faces a difficult challenge. Inflation remains above target, but much of the recent pressure is coming from higher energy prices tied to the war with Iran. Higher interest rates can reduce demand, but they cannot produce more oil, restore disrupted supply or end a war. If the conflict ends, energy supplies normalize and oil prices retreat, I believe inflation can resume its downward trend and eventually give the Fed room to stop tightening. Until then, higher interest rates, particularly a 10-year Treasury around 5%, justify some caution on stock valuations.

It is our aim at Asbury Wealth Partners that you find the market commentary we provide informative and useful. As our success grows mainly through referrals from our clients, we encourage you to share this weekly newsletter with your friends, family, and colleagues. If you are a client, we thank you for your business and your confidence. If you are not yet a client, we encourage you to contact us today and explore how our team may be able to add value to your unique financial situation.

Thank you,

Paul O'Hara, CFP®
[email protected]