Stocks sank on Wednesday, with one market pundit proclaiming, “The Fed is at a point where it can’t ignore inflation. I’m not surprised the world has shifted to a higher interest rate mindset.”
And stocks rallied on Thursday, with another market pundit asserting, “The fact that the 10-year yield is lower today, and that even when it was elevated and got past 4.5%, it didn’t get a lot beyond there, so I think some of the concerns about higher interest rates are moderating. That’s also positive for the markets.”
Everything is so definitive…even as we know from studying the historical evidence that stocks tend to rise in the fullness of time no matter the level or direction of interest rates,…
…with short-term market gyrations caused by a myriad of factors, so those charged with explaining the moves are left with no choice but to see which way equities have headed that day and then fill in the blanks with the news du jour to provide some sort of rationalization.
That does not mean that interest rates don’t matter when it comes to stock prices. After all, there should be a change in thinking for investors if they are earning 0.01% on their cash versus 3.37% or 5.1%, but a look at the Schwab Government Money Market Fund shows that yields on risk-free investments rise and fall,…
… with seemingly little impact on the long-term direction of equities.
Still, we note that despite a lot of volatility, the yield on the benchmark 10-Year U.S. Treasury fell, yes fell, last week from 4.48% to 4.45%, even as the yield on the 2-year rose from 4.08% to 4.18%.
There were big moves in bond yields last week, with the catalyst Wednesday’s Statement on monetary policy and Press Conference following the first meeting of the Federal Open Market Committee under Kevin Warsh.
While the Fed left the target for the Fed Funds rate unchanged, as expected, the new Fed Chair significantly shortened the Statement, with the last six words causing some indigestion in the financial markets,…
The Federal Open Market Committee approved the following statement for release by a 12 – 0 vote: The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system. Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
…as the odds of interest rate hikes increased. Indeed, the Fed Fund futures now call for 1.5 25-basis point increases by year end and as many as 2 by next March, and Fed officials themselves raised their estimate of the year-end rate to 3.8%, up from a projection of 3.4% three months ago.
Those same Fed officials boosted their outlook for inflation and lowered their forecast for real (inflation-adjusted) GDP growth this year to 2.2%, but Mr. Warsh offered relatively upbeat comments on the economy in the opening remarks at his Press Conference.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are both strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Further, while data out last week for May on housing starts and building permits came in well below expectations, numbers on retail sales and pending home sales exceeded estimates and the latest forecast from the Atlanta Fed for Q2 real (inflation-adjusted) GDP growth stood at a solid 3.0%.
True, the Conference Board’s Leading Economic Index for May was less enthusiastic,…
“The Leading Index for the US increased slightly in May, fueled entirely by positive contributions from financial components, especially stock prices and the interest rate spread,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “On the non-financial side of the LEI, only ISM® New Orders Index showed some strength, with consumer expectations remaining a major drag. Despite two consecutive monthly increases, the LEI’s six- and twelve-month growth rates were still negative, suggesting slower economic expansion ahead. Consumers are feeling squeezed because everyday costs—especially gas and energy—are rising faster than their incomes, leaving many households with less money available for things like travel, restaurants, entertainment, and shopping. The good news is that businesses are spending heavily on AI, data centers, and new technology, helping to keep the economy growing, while consumers pull back spending. The overall job market is expected to stay fairly healthy in 2026, but economic growth will be weaker than in recent years. The Conference Board is currently projecting 1.8% y/y GDP growth in 2026, down from 2.1% in 2025.”
…and developments in the Middle East and their impact on energy prices will impact inflation and potential Fed policy, but we do not lose a lot of sleep over the direction of interest rates nor the health of the economy.
Stocks historically have proved rewarding for those who stick with them through thick and thin because businesses have become more valuable over time as corporate profits have risen. Anything can happen, of course, and the equity futures were pointing to a downturn when trading reopened today as the Strait of Hormuz was again closed by the Iran, but the outlook for corporate profit growth currently remains robust this year and next.
Earnings per share estimates from data provider Bloomberg for the S&P 500 presently reside at $341.99 for 2026 and $394.24 for 2027, up from $269.24 in 2025. No doubt, those EPS predictions are being goosed by AI and we have continued to benefit from our exposure to stocks involved in the build out of data centers and infrastructure, where the news flow has been very positive, exciting momentum-based traders.
For example, shares of chipmaker Intel (INTC) jumped last week after President Trump said Apple (AAPL) agreed to work with the company to design and build chips in the U.S., while communications equipment maker Corning (GLW) saw its stock rally after Amazon.com (AMZN) said it entered a multibillion-dollar agreement with the communications equipment maker for optical fiber, cable and connectivity solutions to support its growing data center footprint.
Trade Update
With shares of AI darlings Seagate (STX), Lam Research (LRCX) and Micron Tech (MU) continuing to advance stronly over the last month, again pushing weightings in some of our broadly diversified portfolios to levels above our comfort zone, we chose last week to continue with our long-playing strategy of taking a few chips off the table on sizable winners in those accounts as a risk-mitigation tool and to free up cash for other undervalued opportunities.
However, we continue to hold outsized positions in STX, LRCX and MU for selected accounts and we remain enthusiastic about the forward prospects for all three companies. The recent share price appreciation reflects powerful secular tailwinds, including the explosive growth in artificial intelligence, the increasing need for high-performance computing infrastructure and an unprecedented wave of investment in data centers and memory-intensive applications. Although valuation metrics for Lam and Seagate have become stretched in the near term, and Micron's valuation remains relatively reasonable considering its earnings and cash flow potential, we believe the market is appropriately recognizing the improved structural outlook for these businesses.
Importantly, these companies are not simply cyclical semiconductor names benefiting from a temporary upswing. Lam Research remains a critical player of advanced semiconductor manufacturing, Micron is uniquely positioned to capitalize on surging demand for high-bandwidth memory and AI-related DRAM and NAND products, and Seagate is benefiting from the growing storage requirements of hyperscalers and enterprise customers in an increasingly data-driven world.
As long-term investors, we continue to think these companies possess durable competitive advantages and significant earnings power, and while periods of consolidation would not be surprising following their strong momentum, we believe the secular growth opportunities ahead justify maintaining meaningful positions in each of these high-quality franchises.
Of course, the current investment climate is characterized by sharp moves in both directions, so we think it prudent to be careful in our overall AI exposure, as traders can be very fickle.
Speaking of fickle, short-sighted (in our view) traders created opportunity for us to add well-known software company Intuit (INTU) to our Value87 Yield (formerly referred to as Dividend Income) portfolios, where our Tech exposure is not as great as in our Flagship Value accounts. We wanted to share some of our thought process around this new purchase.
We believe that Intuit is a high-quality franchise with leading positions in tax preparation, small-business accounting, payroll, payments, lending, personal finance and marketing software. Through TurboTax, QuickBooks, Credit Karma and Mailchimp, the company serves consumers, self-employed individuals and small businesses across a large and growing addressable market estimated at more than $300 billion. One of the foundational attractions to Intuit is its durable business model. Financial recordkeeping, tax compliance, payroll administration and related workflows are mission-critical functions with high switching costs, and in areas like tax, heavy regulation.
QuickBooks and TurboTax benefit from deep customer relationships, extensive proprietary data, strong brand recognition, and significant domain expertise built over decades.
A potential key growth driver is Intuit's evolution from a back-office accounting platform into a broader operating system for small businesses. QuickBooks now extends beyond accounting into payments, payroll, bill pay, lending, commerce, marketing and client relationship management (CRM) software. Additionally, the integration of Mailchimp's customer and marketing data with Intuit's financial data creates opportunities for cross-selling, increased customer retention and higher revenue per user.
Artificial intelligence presents both risks and opportunities, with the concerns being a main catalyst for the recent plunge in the stock price, down more than 60% over the last year. While AI may lower barriers to entry in some software categories, Intuit appears to us to be relatively well positioned given its proprietary data, embedded workflows, regulatory complexity and trusted customer relationships.
Additionally, the company's "AI + Human Intelligence" strategy focuses on delivering outcomes rather than simply providing information. The emergence of agentive AI may further strengthen Intuit's competitive position. AI agents that can automate financial workflows, manage cash flow, prepare taxes, optimize marketing or recommend lending solutions become more valuable when operating on top of Intuit's proprietary financial and customer data. We see multiple scenarios where Intuit has the potential to be a beneficiary of AI adoption rather than a victim of its disruption.
The company has additional growth opportunities. TurboTax Live expands Intuit's reach into the assisted tax market, which is substantially larger than the traditional do it yourself (DIY) category. Intuit Enterprise Suite provides a new avenue for growth in the mid-market, allowing the company to move beyond its historical small-business focus and address more complex customer needs.
Key risks include accelerating AI-driven competition, regulatory changes affecting tax preparation or financial services and economic pressure on small-business customers. Overall, we think Intuit represents a durable franchise with strong competitive advantages, multiple growth channels, significant AI-related opportunities and a history of disciplined capital allocation. INTU combines double-digit revenue growth with attractive profitability, generating operating margins near 40% and creating substantial free cash flow. Shares currently trade at just 10 times the consensus forward adjusted P/E projection, versus the 10-year trailing average of 40 times and the 5-year trailing average of 30 times. Even with investor pessimism at a multi-year high, the consensus EPS estimates for fiscal 2027, 2028 and 2029 are $27.28 and $30.16 and $35.02, respectively, according to Bloomberg.
Additionally, the company has been returning capital to shareholders with a $1.20 quarterly dividend (the yield is 1.7%) and last month a new $8 billion share repurchase authorization was announced. INTU is about as out-of-favor a stock as they come, but we are patient and our V87 Goal Price is $529.
