Market Thoughts: Let’s do the Time Warp again?

With Halloween just around the corner… The Rocky Horror Picture Show somehow seems a fair thematic corollary (in another dimension) to the pain bond investors have had thrust upon them. In particular as conflict in the Middle East broadens.

Investors are doing their best to look through higher price inflation, driven by the war. There are other bond market negatives percolating but, as I’ve said before, the crux of rising anxiety is being pushed by energy prices. Food prices may soon follow.

The ongoing impact of sticky inflation is broadening. We’re seeing it in consumer and producer prices. Businesses are trying to manage their margins as input prices continue to rise. That’s not lost on the bond market. Nor on policymakers.

If an off-ramp to a ceasefire doesn’t happen, the moves we’ve seen in bond yields may begin to weigh heavy on risk assets. Also, consumer sentiment. The knock-on effect? A slow and steady drag on global growth. The worst kind of pain is self-inflicted.

Nothing we’re hearing from C-Suite execs makes me think margins, and by extension earnings growth, will derail soon. That said, we may see investors curb enthusiasm for dip buying. I’d expect that to coincide with multiples re-rating, weighing on future returns.

This earnings season should help underscore the upward trend in equity markets. Geopolitics will cap upside, as caution ramps higher. A momentary pause to reason. Exuberance restrained.

Equity markets are forward looking. Hope springs eternal. Don’t look back. To borrow a phrase… investors are ‘voting machines’ when times are good. They’re ‘weighing machines’ when things get bumpy. We may be approaching that tipping point.

Earnings will have to work overtime if things don’t calm in the Gulf. Show me the money is well and good in a steady state environment. As investors begin to question the macro outlook, reported earnings aren’t enough. They’re backward looking. Forward guidance will be scrutinized.

That examination may translate into air pockets of doubt as investors challenge the ‘blue skies’ cast from a bull market that’s run hard for four years. I say none of that to be alarming. I’m simply pragmatic about how a market behaves when animal spirits are challenged. They hit speed bumps.

Unease is creeping into pundit commentary, qualifying the current market as a bubble. I don’t say this dismissively, but isn’t there always a bubble narrative somewhere in the making? Every cycle ends. This one’s been going on for quite a while. That’s something to factor into your risk-taking.

The trillion dollar question about bubbles… how long can they go on? Anyone pretending to have that answer today doesn’t. Perhaps with the exception, one day soon, of Super Intelligence. I say that only half-joking. I’ll add, not all bubbles burst. Some are grown into.

Based on capex, investment and momentum across the AI-complex, a bubble doesn’t appear to be imminent. That doesn't mean we can’t have a meaningful correction. Given the strength of earnings and balance sheets, the market seems primed to run further. Though today, not faster. Mind the gaps.

Corporates are the largest buyers of stocks in the U.S. Announced buybacks so far this year are in excess of $1 trillion and rising. While companies may increase their buying in market pullbacks, that record-pace dollar headline is misleading.

Companies are spending more yet buying back fewer shares given higher stock prices. I point that out to temper some of the excitement that if animal spirits reverse, companies will step in to provide ‘record’ support. If the macro environment truly turns, companies may pause repurchases.

As war drags on, pundits will be goaded to pivot from bubble talk to forewarning recession. We aren’t seeing anything like that today in the macro data. But as war in the Gulf continues, let alone amplifies across the region, expect a recession narrative to gradually surface. In any given year there is typically about a 15% chance of recession.

Our base case hints at lower expected returns ahead. An emotional pause is needed for investors to calm. Where bond markets lead, risk assets always follow. Next up? The Federal Reserve, European Central Bank, and Bank of Japan monetary policy meetings at the end of October. Trick or treat?

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 10/15/26

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