Economy & Markets
Aug 12, 2026
Economy & Markets
Sep 1, 2026
Rear Window
Michael Cembalest
Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
Over the last year, the Eye on the Market included views on sectors, rates and currencies. For this back-to-school piece, I prepared a rear window post-mortem on each.
What we got right: a buying opportunity in healthcare; stagnation of the hyperscalers; the bursting of the Korea/semiconductor/memory stock bubble; software stocks were oversold after the Citrini Research panic; the nuclear/SMR renaissance illusion; the US dollar will remain stable; Oracle debt and equity are overpriced; the Fed’s next move will be a hike not an ease; risks to traditional entertainment stocks from alternative media.
What we got wrong and what we missed: China AI basket; Chicago/Illinois default risk; outsized gains in Korea, Taiwan and Japan; the US Small Cap recovery; Asian/EM fixed income; Western critical minerals companies.
To conclude: thoughts on what NYC Mayor Mamdani’s Administration is planning with respect to residential real estate seizures and transfers to tenant groups/non-profits.
Descriptive audio
MICHAEL CEMBALEST: Good morning, everybody, and welcome to the September Eye on the Market podcast. This one's called "Rear Window." We're going to do three things. We're going to do a market update. We're going to take a look at some postmortems on the last year of Eye on the Market calls. And then we're going to take a look at the end at Mamdani versus history, with respect to the new mayor's policies on seizing delinquent buildings and distributing ownership back to nonprofit groups and tenants.
So let's see. In case you missed it, over the summer, at the end of the summer, there were three major Eye on the Market publications. The first one was called Patchmageddon, and I worked with JP Morgan's cybersecurity people, a very impressive bunch, and we wrote a piece on how new frontier models have created a step change in cyber risks for software and hardware. 20 something pages, goes through all the details. It's a great read if you're focused on those issues.
We had the Year of the Trojan Fire Horse, which was Chinese economic imbalances and unrelenting mercantilism. And then we also had a mid-year energy update that looked at the latest impacts of the Iran war on the global energy transition.
The other thing that happened over the summer that's worth noting is I caught what might be one of the largest tarpon ever caught on a kayak. It was around 200 pounds. And I have a Hobie Mirage Outback kayak, that I keep in Trinidad, that I shipped there. You can see a quick 7 second video reel or a longer three minute version of this. And I put some links in the Eye on the Market if you're interested in seeing them.
Anyway, let's get to it. So the good news is this has been-- in terms of a market update, this has been a very strong year for earnings revisions. If you take a look at the evolution of what earnings do over the year in terms of their projections for the year end. This other than 2021, which was a weird post-COVID year, this is the strongest earnings revisions year since 1996 in that earnings projections are rising around 10% compared to where they started the year.
The other thing that was good about the Q2 earnings season was positive news for the hyperscalers. Annual revenue growth of over 30% for AWS and Microsoft Azure, Google Cloud up 82%. There were rising revenue backlogs, which is reinforcing evidence that companies are starting to be able to monetize AI. Google's backlog increased $52 billion to over $500 billion, and earnings strength is also more broad-based now than it was in 2024-2025, when 40 or so AI-related stocks were the primary drivers. There's a broader earnings recovery that's taking place, so that's good news.
Now the question is, is it sustainable? Because the earnings growth appears to be very contingent on continued AI capital spending, which has risen from about $200 billion a year in 2024 to $750 billion over the last 12 months. And there's a chart we have in here that explains why I think earnings strength is so contingent on this.
Normally, the share of companies with rising earnings is very closely linked to this ISM manufacturing survey. But over the last two or three years, there's a huge increase in the share of companies with positive forward EPS guidance, but not such a big increase in the manufacturing PMI. So to me, that's a clue that we're having outsized earnings growth here. That's disconnected from the broad economy and very much being driven by the boom in capital spending.
The other thing to remember, too, is that some of this earnings strength is related to reevaluations of Anthropic and OpenAI positions that are held by Amazon, Google, and Microsoft. Q2 had a ridiculous almost 50% earnings growth figure, which is only, let's say, 30% if you strip out some of these other income revaluation gains. And the median stock earnings were only up 10% or 12%. So obviously, a lot of skew in there.
Before we get to the report card Eye on the Market calls, I just want to make a couple comments on the August Treasury intervention, which may have struck some of you as odd. And it struck me odd as well. Normally, the Fed does things to control the level of interest rates, both at the long end and the short end. But the Treasury did what's called an operation twist. The Treasury doesn't have the ability just to do whatever it wants. It generally has to finance things that it wants to do to the yield curve.
So the Treasury announced it's going to increase monthly purchases of 10 to 30 year treasuries from about $5 billion to a little over $10 billion. And they're going to finance this by either issuing more short-term debt, maybe three or five year paper, or drawing from their general account cash balance. If these limits remain, this twist operation is only a quarter of the size of the one that the Fed did a little over a decade ago, while at the same time, the stock of long duration longer than 10 year treasuries have gone from $1 trillion to almost $6 trillion.
So the bottom line is, I think, Secretary Bessent's going to have a tough time, or at least tougher than the Fed did 10 years ago, constraining rates with a twist operation like this. As things stand right now, treasury yields are almost exactly back where they were when the intervention was announced. And this follows on some policies in July. The yen was weakening. And I think the treasury was afraid that Japan was going to try to support the yen by purchasing yen and selling dollars and selling dollars in the form of their long duration treasury holdings.
So Bessent had the Fed essentially make a repo facility available to Japan to borrow the dollars instead of selling their treasuries so they would borrow dollars to intervene in the yen. And the yen rallied quite a bit, but is selling off again. So again, these interventions tend to work in the short-term. But then in the longer term, the fundamentals are what drives what happens to currencies and rates. Unless you have a massive bazooka to back it up.
And the three big challenges that Bessent is facing here is, number 1, economic conditions are just very strong for the level of the funds rate. And we have a chart here that shows historically, whenever the ISM employment index is where it currently is, the Fed is usually raising, not easing. When the price is paid index is where it is, the Fed's usually raising, not easing. And the supplier delivery index, which is a measure of tightness in supply chain, is normally-- the Fed's normally raising not easing when the level is where it is today. So the bottom line is part of the long-term rate rise is a reflection of market concerns that the economy is stronger than where the funds rate happens to be.
The second one is obviously, everybody knows this, but the debt and the deficit numbers continue to deteriorate. The debt's not deteriorating that fast. The $40 trillion number got a gazillion headlines. But at the end of the day, it's just been a minor deterioration compared to where it was a few months ago. The deficits, the thing that's getting worse, which is a concern because in a strong economy like this or growing economy, you shouldn't see this kind of deterioration in the deficit.
And then maybe the biggest one that people need to spend more time thinking about is the explosion in hyperscaler debt issuance, which is crowding out the treasury at the long end of the curve in terms of treasury now has to share the supply with buyers, with the hyperscalers who are flooding the market with long duration issuance. I mean, these numbers were below $50 billion a year for the five hyperscalers plus NVIDIA from 2015 until 2024. And then last year, that number was about $180 billion. And this year, it's almost $300 billion. And we're only in August.
And this is looking at new investment grade debt plus the SPVs, which I've written about before. Through some shenanigans, these tech companies have figured out how to sign what to me looked like capital leases that should be consolidated for accounting purposes. And because they have the ability to walk away with a contingent obligation depending upon the demand for the data center at the time, they figured out a way to get their accountants to not consolidate. So we do. We consolidate. So consolidating those single obligor SPVs, there's a lot of debt.
And the cleanest way to look at this is to look at the hyperscaler debt issuance as a share of Treasury bond issuance. And a few years ago, that was less than 10. Last year was 30. This year, it's almost 70. So think about that. Hyperscaler long duration debt issuance this year is 70% of all of the Treasury bond issuance. And so that's an amazing figure. I know it says 50 at the top of the page. That was before he added in the SPVs. Now it's 70.
So anyway, the core of this Eye on the Market is called "Rear Window," if you remember that movie. It's a great Hitchcock movie, and James Stewart has a broken leg, and he's looking in a camera across a building across the way, and he witnesses a murder. And then the rest of the film is about him trying to track down the killer, while at the same time romancing Grace Kelly, which are two very compelling things that one would presumably want to do.
So anyway, we're going to take the Rear Window, look at the Eye on the Market calls that have taken place over the last year or so and how they turned out. So let's start with what we got right. The first one is the health care recovery. And health care used to be one of the market's best sectors, attract the tech sector for the better part of almost 35 years and then imploded. And from 2020 to 2025, health care underperformed tech and a whole bunch of other major sectors as well.
And last August, in August 2025 when we wrote our "Sick as a Dog" piece to highlight the opportunity in health care, it was trading at probably one of the lowest valuations in its history. And our piece last year highlighted the opportunity in health care for value investors. Since our publication, health care has not just tracked technology, but both large cap, mid cap, and small cap health care have rebounded pretty sharply and have outperformed the market, and all segments of health care have participated except health care equipment.
So, in other words, managed health care, biotech, life sciences, pharma, health care services, they've all rebounded pretty nicely. As a matter of fact, sometimes you have to be good and lucky. On the day that we published our value buy recommendation on health care a little over a year ago, Buffett made an investment in UnitedHealthcare, which was a pretty bold thing to do given the circumstances. So that call worked out pretty well.
The next one that worked out was a comment that we had in the Outlook this year on the end of the outperformance of the hyperscaler stocks. And the hyperscalers, remember, had been outperforming for several years the broad market. But in January, we were really focused on the risks in terms of falling free cash flow, rising reliance on debt to fund capital spending, a decline in stock buybacks and not enough signs of positive returns on invested capital. And so far, the hyperscalers this year have underperformed the tech sector, the broad market, and the S&P Ex-Technologies. So that call worked out.
We eerily and I'm not going to say we totally did this on purpose. But when we warned about the peaking values of the Korean stock market and global semiconductor stocks, we happen to publish on the day of the peak, and it's been declining ever since. And what spooked us was the technicals in the semiconductor stocks had breached levels that you hadn't seen since the dotcom boom. And hedge fund exposure was soaring to both semiconductor hardware stocks. Korean margin debt was off the charts. Option premiums were flying.
And then the other one that was interesting was I talked to our derivatives people. There was a surge in market risk associated with leveraged semiconductor ETFs. I'm not going to go through the math on that, but we had a chart that showed how that had gone up. And almost immediately after we released this piece in June, both the Korean stock market and the global semiconductors started to sell off. And as you can see here, almost immediately after we published, you had an unwind of the stock margin loans in Taiwan, Korea, and China.
The other thing, and this one I'm proud of given the panic that was taking place. Do you remember the Citrine memo earlier this year that everyone was panicked about? They were talking about how the sudden rise of agentic AI was going to destroy the software industry. And we did a webcast. And I said, up until last week, Citrine was a gem that people talked about and not even a fancy one. And I thought people were getting carried away with this thing.
The software company forward earnings projections are stable. The valuations relative to the market reached the lowest level since 1991. And there was panic selling the likes of which in software. Yet we haven't seen since the dotcom unwind. And since our March webcast on this topic, large, mid, and small cap software stocks have recovered anywhere from 20% to 30%. So again, our timing on that one was very good. And we have a chart in here in the piece this week that shows what is panic selling look like. And the software ETF daily turnover numbers hit 60% of market cap, which is a number that hasn't been seen since the depth of 2002-2003.
So one more, Honey, I Shrunk the Nuclear Plant. I'm a skeptic of SMRs. We'll see how it turns out. But to me, in the energy paper that we wrote earlier this year, even with the prospect of n-th of a kind cost reductions, small modular reactors might end up costing 2 to 2 and 1/2 times more than current grid power options. And the notion that you can economically modularize and miniaturize the most capital intensive industrial project that exists in the world is a completely unproven proposition.
A couple of tech Giants might just do it to show they can do it. But as a broadly adopted form of new grid power, the SMRs face very steep proof of concept and more importantly, proof of cost challenges. They can be built. The question is the cost. And so, since our March energy paper at benchmark, nuclear index has declined relative to both renewables and traditional oil.
The dollar is like Rasputin. Impossible to kill it. Everybody hates it. The popular view among macro investors and strategists is the dollar is too high, given all the problems the US faces. But you've heard me write about this, and we had a section about this in the Outlook this year. We tracked the specific things that make the dollar the world's reserve currency.
So the dollar share of foreign exchange reserves, of international debt issuance, of affects transaction volumes, of SWIFT payments, of trade invoicing, and we just don't see that there's enough evidence that any of those numbers are changing. And the dollar actually drift up this year. And it's still flat even after the Treasury intervention, which spooked people. So we were right about this one.
And then if you remember the Delphic Oracle, we were Delphic about Oracle. So a little over around a year ago, Oracle stopped, jumped by 25% after they were promised $60 billion a year for OpenAI. And what we pointed out was, well, that's the amount of money that OpenAI doesn't earn yet to provide cloud computing that Oracle hadn't built yet, and which will require the equivalent of four nuclear plants, as well as massive borrowing by Oracle, whose debt to equity ratio was already 500%, which was 10 times the level for Amazon and Microsoft.
So we felt that Oracle as a company was absurdly mispriced. And ever since then, the stock has plummeted and their credit default swap spreads have gone from 30 or 50 basis points to over 200.
Then around a year ago, the markets were pricing in an ease rather than a hike or at least no action by the Fed. And if you look at the Fed funds futures pricing for December of this year, the markets are currently pricing in anywhere a little above 3.8%. So what we wrote a year ago is that with the exception of one cycle around the S&L crisis, the Fed almost never cuts policy rates when manufacturing and service sector price surveys are rising, which is what they were doing last year.
And we felt the next Fed move would be a hike rather than an ease, despite all the pressure that that word can get from the White House and Fed funds. Futures prices have risen by almost 1% for that December 26 contract since then.
And last one that I want to talk about that worked out. Media companies are complicated. There are multiple revenue drivers for companies like Fox and Disney and Paramount. But we wrote a piece last November that-- and a lot of the challenges on media that we mentioned last year are still in place. Streaming platforms are taped. YouTube and Amazon Prime are taking viewership away from the legacy broadcast and cable companies.
Streaming companies like Disney+ and Paramount+ and Peacock are less profitable for their parent companies than the cable and broadcast channels they're replacing, because the legacy stuff didn't require all the major spending on content distribution and hardware and consumers and viewers now spend more than 90 minutes a day on social networks, and that's displacing time that used to be spent watching television. And so a lot of those pressures are still in place.
I am a little puzzled by how Netflix stock has struggled this year. Their earnings look good to me. Their subscriber performance looks fine. The company's decision to stop disclosing certain customer engagement metrics was not a confidence builder. But again, I don't understand why the stock's doing as poorly as it is. In any case, since we published our winter of discontent Eye on the Market, Netflix is down. So is paramount. So is Fox. And Disney and Comcast are flat at a time when the market's up 14%, 15%. And only Warner Brothers is up courtesy of an offer which continues to negatively impact Paramount. Its bottom line because of the debt and the late closing penalty.
So let's talk about what we got wrong and what we missed. In the early summer, we highlighted opportunities in Chinese AI because we saw the Chinese AI was building out homegrown alternatives to all sorts of AI-related infrastructure and lithography and things like that. And we outlined 32 Chinese companies semiconductors, software, power, electrical components, heavy equipment, machinery, transport, stuff like that, interactive media. And those stocks had done well. But as soon as we made this recommendation, they rolled over a bit. And also they underperformed our US AI basket. So we got the timing on that one wrong.
The next one is a funny one to me. Chicago and Illinois have amongst the worst financials among US municipalities. They face the added challenge that most of their unfunded obligations are related to pensions, which are immutable according to state constitutions, rather than based on retiree health care obligations, which are easier to change unilaterally.
Federal stimulus money has run out, and there are declining commercial property values in the Chicago loop, and those resulted in the largest residential property tax hikes in 30 years. The credit markets unfortunately show absolutely no sign of concern about this issue. And as a pie in the face to me, Chicago and Illinois credit spreads have actually tightened since we published the blob Eye on the Market a little over a year ago. So there you go.
And another one where the theme was right, the timing was bad, was China introduced new critical mineral export curbs targeting the US. And we thought this would create opportunities in some of the Western critical mineral suppliers. Those gains did take place in early 2025, but by the time we made our recommendation in October, most of the gains had already taken place and that Western critical minerals index is roughly flat since that time.
And then in terms of missed opportunities, first I'll do equities. While we did a good job highlighting the peak in Korea and Taiwan, even after the corrections, those stock markets are still up a ton this year. And we did not foresee those outsized returns in Korea, Taiwan in the 2026 Eye on the Market outlook. And again, we did a good job calling the top, but we weren't involved from the beginning of the year.
And then we also didn't highlight the possibility of a recovery in small cap. US small cap has recovered this year. It's down a little bit better than US large cap. This thing is like a cicada. It lives underground for 1,700 years and merges. But anyway, it emerged this year, flapped its wings around, and we did not highlight that opportunity.
And then similarly, there were opportunities this year in Asian and emerging market fixed income, Chinese local currency debt, emerging market local currency debt, Asia high yield, emerging market, local currency bills. All of those things had pretty good years with returns of 4% to 7% while returns on US investment grade bonds and US treasuries were flat. So that was a missed opportunity as well. So that's the end of the report card section.
I want to close with New York City and what's going on with the mayor's real estate policy. And so in February, I wrote a piece called "Supply and the Mam" with the Mam being Mamdani. And it covered a lot of stuff-- the 1970's debt crisis, New York City residential real estate, all of the strange rules around rent control and rent stabilization, the New York City housing shortage, the new city of Yes zoning regulations that Adam's put in place, New York City budget and borrowing limitations on the mayor that were put in place in the 1970s, property tax rates, scaffolding laws, and then most importantly, some new 2019 rules, which render many renovations deeply unprofitable for landlords.
And with that, we then covered Mamdani's plan to seize properties and transfer them to tenant groups and non-profits. And that's a policy the mayor more explicitly outlined in his May report that was called "Block by Block." And the mayor's policy is simple. As landlords postpone improvements because renovation payback years-- renovation payback periods can now exceed 25 years. The city will then conduct these really detailed a roof to cellar inspections and impose fines, and severely delinquent landlords risk being declared negligent and then subject to having their buildings seized and transferred for public safety reasons.
So I have a lot of questions here because-- well, first let's look. There's a chart that we had in back in February that we repeated this time. Look at the impact of this 2019 bill, the Housing Stability and Tenant Protection Act. The major capital investments that were made by property owners collapsed and individual apartment improvements, number of filings completely collapsed. And then what's happened since 2019 is that operating costs have soared compared to the one year and two year rent increases.
So obviously, a lot of landlords are going to postpone making improvements during periods like that. But I have a lot of questions because there's a very checkered history of similar policies taking place in New York. So Mamdani's plan relies on something called New York City Article 7A Program. It was enacted in 1965, and it allows housing courts to appoint administrators to operate what they call effectively abandoned and unsafe buildings.
So in the '70s and '80s, city appointed administrators were the ones that collected rents on around 6,000 buildings, and they redirected those rents towards repairs. But the problem is the rents didn't cover the expenses. So most of these buildings simply accumulated property tax arrears and their conditions remain generally deplorable. Nobody benefited and the city ended up being on the hook on average for 19 years and spent billions in the process.
So I don't know exactly how the Mamdani administration is going to avoid repeating these kind of outcomes without substantial taxpayer subsidies, which so far really haven't been announced or disclosed. And I don't see how this is going to differ from some of the badly managed and chronically underfunded New York City public housing projects. We'll have to see.
I don't understand how the new rent controls, mandatory construction, wage increases, and these property seizures are going to incentivize development of new units. If anything, these policies might prompt some landlords to remove certain buildings from the market entirely, given the risk of appropriation. And so if nobody's living in a building, it can't be expropriated because it's not a risk to any actual tenant. If that's the case, you're going to further increase the stock of the units that are currently held off market.
And just to show how much some of the policies in the Democratic Party have changed, Jason Fuhrman was the former chairman of Obama's Council of Economic Advisors. And a couple of years ago, he was interviewed and he said, quote, "rent control has been about as disgraced as any economic policy in the toolkit," end quote. So what does that imply regarding the medium term impact of the latest round of rent controls in New York City on housing supply and costs? So what are the landlord's going to do?
Well, all seven judges on the New York Court of Appeals were appointed by Democratic governors, so property owners are unlikely to get any relief there. Will they appeal at the Supreme Court and claim some unconstitutional expropriation that is inconsistent with the 14th Amendment Due Process clause? I don't know. But I think at some point, you'll see some coordinated industry response.
I want to close with just one comment on this. And I'm in learning mode, so I haven't made any firm judgments here. But to me, as I read through some of these policies, it makes me wonder, "is this just the beginning of a larger battle between the private sector in New York City and administration, who's director that was appointed by Mamdani, the Director of the Office to Protect Tenants was quoted to saying "home ownership is a weapon of white supremacy masquerading as wealth building public policy, and that it was necessary to impoverish the white middle class."
Those are their quotes, not mine. And so these policies are residential real estate could be the beginning of a longer process. And we'll just have to wait and see how this plays out. But the battle lines are definitely being drawn. Thank you very much for listening. That is the end of the September Eye on the Market. And if you want to know more about tarpon fishing in Trinidad, email me. Bye.
(DESCRIPTION)
Text: J.P. Morgan, Eye on the Market. September 2026. Rear Window. A Review of Eye on the Market calls, 2025-2026. An image appears on screen that recalls James Stewart and Grace Kelly in the Alfred Hitchcock movie, "Rear Window." Presenter Michael Cembalest sits at an office desk. A J.P. Morgan logo is on a shelf behind him. His likeness also appears in the lens of the camera that James Stewart holds in the image.
(SPEECH)
MICHAEL CEMBALEST: Good morning, everybody, and welcome to the September Eye on the Market podcast. This one's called "Rear Window." We're going to do three things. We're going to do a market update. We're going to take a look at some postmortems on the last year of Eye on the Market calls. And then we're going to take a look at the end at Mamdani versus history, with respect to the new mayor's policies on seizing delinquent buildings and distributing ownership back to nonprofit groups and tenants.
So let's see. In case you missed it, over the summer, at the end of the summer, there were three major Eye on the Market publications. The first one was called Patchmageddon, and I worked with JP Morgan's cybersecurity people, a very impressive bunch, and we wrote a piece on how new frontier models have created a step change in cyber risks for software and hardware. 20 something pages, goes through all the details. It's a great read if you're focused on those issues.
We had the Year of the Trojan Fire Horse, which was Chinese economic imbalances and unrelenting mercantilism. And then we also had a mid-year energy update that looked at the latest impacts of the Iran war on the global energy transition.
(DESCRIPTION)
Text on the screen shows the title of that energy report to be "PolySandra".
(SPEECH)
The other thing that happened over the summer that's worth noting is I caught what might be one of the largest tarpon ever caught on a kayak. It was around 200 pounds. And I have a Hobie Mirage Outback kayak, that I keep in Trinidad, that I shipped there. You can see a quick 7 second video reel or a longer three minute version of this. And I put some links in the Eye on the Market if you're interested in seeing them.
Anyway, let's get to it.
(DESCRIPTION)
A graph appears with the title "Evolution of S&P 500 EPS forecasts since 1996." The year 2021 is at an index of 115, and the year 2026 is at an index of 110, along with 2018.
(SPEECH)
So the good news is this has been-- in terms of a market update, this has been a very strong year for earnings revisions. If you take a look at the evolution of what earnings do over the year in terms of their projections for the year end. This other than 2021, which was a weird post-COVID year, this is the strongest earnings revisions year since 1996 in that earnings projections are rising around 10% compared to where they started the year.
The other thing that was good about the Q2 earnings season was positive news for the hyperscalers. Annual revenue growth of over 30% for AWS and Microsoft Azure, Google Cloud up 82%. There were rising revenue backlogs, which is reinforcing evidence that companies are starting to be able to monetize AI. Google's backlog increased $52 billion to over $500 billion, and earnings strength is also more broad-based now than it was in 2024-2025, when 40 or so AI-related stocks were the primary drivers. There's a broader earnings recovery that's taking place, so that's good news.
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A graph appears with the title "S&P 500 companies with positive forward EPS growth versus ISM manufacturing PMI. It shows the current share of S&P 500 companies with positive forward 12-month EPS growth at about 90%. It also shows the share of ISM manufacturing PMI advanced 6 months at about 70%.
(SPEECH)
Now the question is, is it sustainable? Because the earnings growth appears to be very contingent on continued AI capital spending, which has risen from about $200 billion a year in 2024 to $750 billion over the last 12 months. And there's a chart we have in here that explains why I think earnings strength is so contingent on this.
Normally, the share of companies with rising earnings is very closely linked to this ISM manufacturing survey. But over the last two or three years, there's a huge increase in the share of companies with positive forward EPS guidance, but not such a big increase in the manufacturing PMI. So to me, that's a clue that we're having outsized earnings growth here. That's disconnected from the broad economy and very much being driven by the boom in capital spending.
(DESCRIPTION)
A graph appears with the title "S&P 500 EPS Growth" that shows year over year percentage growth. The second quarter of 2026 shows S&P EPS growth from other other income at 50% and S&P EPS growth excluding other income at 30%.
(SPEECH)
The other thing to remember, too, is that some of this earnings strength is related to reevaluations of Anthropic and OpenAI positions that are held by Amazon, Google, and Microsoft. Q2 had a ridiculous almost 50% earnings growth figure, which is only, let's say, 30% if you strip out some of these other income revaluation gains. And the median stock earnings were only up 10% or 12%. So obviously, a lot of skew in there.
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A graph appears with the title "The August Treasury intervention." It shows the rise and fall of the 10-year US Treasury yield before and after the August 19 announcement of a so-called "twist" operation.
(SPEECH)
Before we get to the report card Eye on the Market calls, I just want to make a couple comments on the August Treasury intervention, which may have struck some of you as odd. And it struck me odd as well. Normally, the Fed does things to control the level of interest rates, both at the long end and the short end. But the Treasury did what's called an operation twist. The Treasury doesn't have the ability just to do whatever it wants. It generally has to finance things that it wants to do to the yield curve.
So the Treasury announced it's going to increase monthly purchases of 10 to 30 year treasuries from about $5 billion to a little over $10 billion. And they're going to finance this by either issuing more short-term debt, maybe three or five year paper, or drawing from their general account cash balance. If these limits remain, this twist operation is only a quarter of the size of the one that the Fed did a little over a decade ago, while at the same time, the stock of long duration longer than 10 year treasuries have gone from $1 trillion to almost $6 trillion.
So the bottom line is, I think, Secretary Bessent's going to have a tough time, or at least tougher than the Fed did 10 years ago, constraining rates with a twist operation like this. As things stand right now, treasury yields are almost exactly back where they were when the intervention was announced. And this follows on some policies in July. The yen was weakening. And I think the treasury was afraid that Japan was going to try to support the yen by purchasing yen and selling dollars and selling dollars in the form of their long duration treasury holdings.
So Bessent had the Fed essentially make a repo facility available to Japan to borrow the dollars instead of selling their treasuries so they would borrow dollars to intervene in the yen. And the yen rallied quite a bit, but is selling off again. So again, these interventions tend to work in the short-term. But then in the longer term, the fundamentals are what drives what happens to currencies and rates. Unless you have a massive bazooka to back it up.
(DESCRIPTION)
A graph appears with the title "Fed easing (green) versus tightening (red). Three dot plots show an employment index, a prices paid index, and a supplier delivery index from July.
(SPEECH)
And the three big challenges that Bessent is facing here is, number 1, economic conditions are just very strong for the level of the funds rate. And we have a chart here that shows historically, whenever the ISM employment index is where it currently is, the Fed is usually raising, not easing. When the price is paid index is where it is, the Fed's usually raising, not easing. And the supplier delivery index, which is a measure of tightness in supply chain, is normally-- the Fed's normally raising not easing when the level is where it is today. So the bottom line is part of the long-term rate rise is a reflection of market concerns that the economy is stronger than where the funds rate happens to be.
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A new graph has the title "Federal debt and deficit as percent of GDP." It compares the federal deficit since 2010 to the federal debt held by the public. Both lines show a general increase since 2010.
(SPEECH)
The second one is obviously, everybody knows this, but the debt and the deficit numbers continue to deteriorate. The debt's not deteriorating that fast. The $40 trillion number got a gazillion headlines. But at the end of the day, it's just been a minor deterioration compared to where it was a few months ago. The deficits, the thing that's getting worse, which is a concern because in a strong economy like this or growing economy, you shouldn't see this kind of deterioration in the deficit.
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A new graph has the title "5 hyperscalers plus NVIDIA new investor-grade debt plus SPVs.
(SPEECH)
And then maybe the biggest one that people need to spend more time thinking about is the explosion in hyperscaler debt issuance, which is crowding out the treasury at the long end of the curve in terms of treasury now has to share the supply with buyers, with the hyperscalers who are flooding the market with long duration issuance. I mean, these numbers were below $50 billion a year for the five hyperscalers plus NVIDIA from 2015 until 2024. And then last year, that number was about $180 billion. And this year, it's almost $300 billion. And we're only in August.
And this is looking at new investment grade debt plus the SPVs, which I've written about before. Through some shenanigans, these tech companies have figured out how to sign what to me looked like capital leases that should be consolidated for accounting purposes. And because they have the ability to walk away with a contingent obligation depending upon the demand for the data center at the time, they figured out a way to get their accountants to not consolidate. So we do. We consolidate. So consolidating those single obligor SPVs, there's a lot of debt.
And the cleanest way to look at this is to look at the hyperscaler debt issuance as a share of Treasury bond issuance.
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A new graph has the title "Hyperscaler plus NVIDIA debt issuance including SPVs as a percent of Treasury bond issuance, in percent" that shows a sharp rise since 2023 from about 0% to a current rate of 70%.
(SPEECH)
And a few years ago, that was less than 10. Last year was 30. This year, it's almost 70. So think about that. Hyperscaler long duration debt issuance this year is 70% of all of the Treasury bond issuance. And so that's an amazing figure. I know it says 50 at the top of the page. That was before he added in the SPVs. Now it's 70.
So anyway, the core of this Eye on the Market is called "Rear Window," if you remember that movie. It's a great Hitchcock movie, and James Stewart has a broken leg, and he's looking in a camera across a building across the way, and he witnesses a murder. And then the rest of the film is about him trying to track down the killer, while at the same time romancing Grace Kelly, which are two very compelling things that one would presumably want to do.
So anyway, we're going to take the Rear Window, look at the Eye on the Market calls that have taken place over the last year or so and how they turned out. So let's start with what we got right.
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A new graph has the title "Healthcare versus Technology" and shows the total return index of S&P 500 tech stocks versus S&P 500 healthcare stocks since the publication of the "Sick as a Dog" report a year ago.
(SPEECH)
The first one is the health care recovery. And health care used to be one of the market's best sectors, attract the tech sector for the better part of almost 35 years and then imploded. And from 2020 to 2025, health care underperformed tech and a whole bunch of other major sectors as well.
And last August, in August 2025 when we wrote our "Sick as a Dog" piece to highlight the opportunity in health care, it was trading at probably one of the lowest valuations in its history. And our piece last year highlighted the opportunity in health care for value investors. Since our publication, health care has not just tracked technology,
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A new graph shows healthcare stock valuations for S&P 500, S&P 500 healthcare, S&P 400 healthcare, and S&P 600 healthcare in the past year.
(SPEECH)
but both large cap, mid cap, and small cap health care have rebounded pretty sharply and have outperformed the market,
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A new graph breaks down the performance in the past year of healthcare sectors into managed healthcare, biotech, life sciences, pharma, healthcare services, and healthcare equipment.
(SPEECH)
and all segments of health care have participated except health care equipment.
So, in other words, managed health care, biotech, life sciences, pharma, health care services, they've all rebounded pretty nicely. As a matter of fact, sometimes you have to be good and lucky. On the day that we published our value buy recommendation on health care a little over a year ago, Buffett made an investment in UnitedHealthcare, which was a pretty bold thing to do given the circumstances. So that call worked out pretty well.
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A new graph has the title "S&P 500 versus Hyperscalers" and compares one-year total return indices for S&P 500, S&P 500 excluding information technology, and hyperscalers. The publication of the Smothering Heights report is in the middle of the timeline.
(SPEECH)
The next one that worked out was a comment that we had in the Outlook this year on the end of the outperformance of the hyperscaler stocks. And the hyperscalers, remember, had been outperforming for several years the broad market. But in January, we were really focused on the risks in terms of falling free cash flow, rising reliance on debt to fund capital spending, a decline in stock buybacks and not enough signs of positive returns on invested capital. And so far, the hyperscalers this year have underperformed the tech sector, the broad market, and the S&P Ex-Technologies. So that call worked out.
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A new graph has the title "MSCI Korea and semiconductors" and shows the total return indices for the past year and a half for the NASDAQ global semiconductor index, the MSCI Korea, and the Philadelphia semiconductor index. All three indices show a decline after the publication of the Semiquincententacles Report.
(SPEECH)
We eerily and I'm not going to say we totally did this on purpose. But when we warned about the peaking values of the Korean stock market and global semiconductor stocks, we happen to publish on the day of the peak, and it's been declining ever since. And what spooked us was the technicals in the semiconductor stocks had breached levels that you hadn't seen since the dotcom boom. And hedge fund exposure was soaring to both semiconductor hardware stocks. Korean margin debt was off the charts. Option premiums were flying.
And then the other one that was interesting was I talked to our derivatives people. There was a surge in market risk associated with leveraged semiconductor ETFs. I'm not going to go through the math on that, but we had a chart that showed how that had gone up. And almost immediately after we released this piece in June, both the Korean stock market and the global semiconductors started to sell off.
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A new graph has the title "Outstanding stock margin loans" and shows the Taiwan, Korea, and China indices for 2026. All three of them show decline after the publication of the Semiquincententacles Report.
(SPEECH)
And as you can see here, almost immediately after we published, you had an unwind of the stock margin loans in Taiwan, Korea, and China.
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A new graph has the title "Software equity performance" and shows total return indices since January 2025 for small cap software, mid cap software, and large cap software. All three indices show growth after the publication of the Future Shock webcast in April.
(SPEECH)
The other thing, and this one I'm proud of given the panic that was taking place. Do you remember the Citrine memo earlier this year that everyone was panicked about? They were talking about how the sudden rise of agentic AI was going to destroy the software industry. And we did a webcast. And I said, up until last week, Citrine was a gem that people talked about and not even a fancy one. And I thought people were getting carried away with this thing.
The software company forward earnings projections are stable. The valuations relative to the market reached the lowest level since 1991. And there was panic selling the likes of which in software. Yet we haven't seen since the dotcom unwind. And since our March webcast on this topic, large, mid, and small cap software stocks have recovered anywhere from 20% to 30%. So again, our timing on that one was very good.
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A new chart has the title "Indicative software ETF daily turnover" that shows percent of market cap since 2002. Large spikes appear in 2002, 2003, and 2026.
(SPEECH)
And we have a chart in here in the piece this week that shows what is panic selling look like. And the software ETF daily turnover numbers hit 60% of market cap, which is a number that hasn't been seen since the depth of 2002-2003.
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A new graph has the title "Energy total returns" and shows indices since January 2025 for oil and gas, renewables, and nuclear. The March 2026 publication of the Fighting Words report appears on the timeline. The nuclear index shows a decline after that date.
(SPEECH)
So one more, Honey, I Shrunk the Nuclear Plant. I'm a skeptic of SMRs. We'll see how it turns out. But to me, in the energy paper that we wrote earlier this year, even with the prospect of n-th of a kind cost reductions, small modular reactors might end up costing 2 to 2 and 1/2 times more than current grid power options. And the notion that you can economically modularize and miniaturize the most capital intensive industrial project that exists in the world is a completely unproven proposition.
A couple of tech Giants might just do it to show they can do it. But as a broadly adopted form of new grid power, the SMRs face very steep proof of concept and more importantly, proof of cost challenges. They can be built. The question is the cost. And so, since our March energy paper at benchmark, nuclear index has declined relative to both renewables and traditional oil.
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A new graph has the title "US dollar indices" and shows indices since 2024 for the Spot Dollar index, the Federal Trade Weighted Nominal Dollar, and the Federal Trade Weighted Real Dollar. All three indices show growth after the 2026 publication of the "Smothering Heights" report.
(SPEECH)
The dollar is like Rasputin. Impossible to kill it. Everybody hates it. The popular view among macro investors and strategists is the dollar is too high, given all the problems the US faces. But you've heard me write about this, and we had a section about this in the Outlook this year. We tracked the specific things that make the dollar the world's reserve currency.
So the dollar share of foreign exchange reserves, of international debt issuance, of affects transaction volumes, of SWIFT payments, of trade invoicing, and we just don't see that there's enough evidence that any of those numbers are changing. And the dollar actually drift up this year. And it's still flat even after the Treasury intervention, which spooked people. So we were right about this one.
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A new graph has the title "Oracle stock price versus credit spreads" and shows the stock price in US dollars since June 2025 for Oracle 5-year CDS and the Oracle stock price. The September 2025 publication of The Blob report appears on the timeline, after which the CDS rises and the stock price falls.
(SPEECH)
And then if you remember the Delphic Oracle, we were Delphic about Oracle. So a little over around a year ago, Oracle stopped, jumped by 25% after they were promised $60 billion a year for OpenAI. And what we pointed out was, well, that's the amount of money that OpenAI doesn't earn yet to provide cloud computing that Oracle hadn't built yet, and which will require the equivalent of four nuclear plants, as well as massive borrowing by Oracle, whose debt to equity ratio was already 500%, which was 10 times the level for Amazon and Microsoft.
So we felt that Oracle as a company was absurdly mispriced. And ever since then, the stock has plummeted and their credit default swap spreads have gone from 30 or 50 basis points to over 200.
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A new graph has the title "Fed funds futures pricing for December 2026" and shows a rise of over 1% after the September 2025 publication of the Fair Shakes report.
(SPEECH)
Then around a year ago, the markets were pricing in an ease rather than a hike or at least no action by the Fed. And if you look at the Fed funds futures pricing for December of this year, the markets are currently pricing in anywhere a little above 3.8%. So what we wrote a year ago is that with the exception of one cycle around the S&L crisis, the Fed almost never cuts policy rates when manufacturing and service sector price surveys are rising, which is what they were doing last year.
And we felt the next Fed move would be a hike rather than an ease, despite all the pressure that that word can get from the White House and Fed funds. Futures prices have risen by almost 1% for that December 26 contract since then.
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A new graph has the title "Select media stock price performance" and shows 7-day moving average indices since January 2025 for six media companies. The November 2025 publication of the Winter of our Discontent report appears on the timeline. Most of the indices show a decline in 2026.
(SPEECH)
And last one that I want to talk about that worked out. Media companies are complicated. There are multiple revenue drivers for companies like Fox and Disney and Paramount. But we wrote a piece last November that-- and a lot of the challenges on media that we mentioned last year are still in place. Streaming platforms are taped. YouTube and Amazon Prime are taking viewership away from the legacy broadcast and cable companies.
Streaming companies like Disney+ and Paramount+ and Peacock are less profitable for their parent companies than the cable and broadcast channels they're replacing, because the legacy stuff didn't require all the major spending on content distribution and hardware and consumers and viewers now spend more than 90 minutes a day on social networks, and that's displacing time that used to be spent watching television. And so a lot of those pressures are still in place.
I am a little puzzled by how Netflix stock has struggled this year. Their earnings look good to me. Their subscriber performance looks fine. The company's decision to stop disclosing certain customer engagement metrics was not a confidence builder. But again, I don't understand why the stock's doing as poorly as it is. In any case, since we published our winter of discontent Eye on the Market, Netflix is down. So is paramount. So is Fox. And Disney and Comcast are flat at a time when the market's up 14%, 15%. And only Warner Brothers is up courtesy of an offer which continues to negatively impact Paramount. Its bottom line because of the debt and the late closing penalty.
So let's talk about what we got wrong and what we missed.
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A new graph has the title "Investing in AI" and shows the total return indices since January 2025 for 32 Chinese AI stocks and 42 AI stocks from the S&P 500. The indices both level off or decline after the publication of the Home Alone report.
(SPEECH)
In the early summer, we highlighted opportunities in Chinese AI because we saw the Chinese AI was building out homegrown alternatives to all sorts of AI-related infrastructure and lithography and things like that. And we outlined 32 Chinese companies semiconductors, software, power, electrical components, heavy equipment, machinery, transport, stuff like that, interactive media. And those stocks had done well. But as soon as we made this recommendation, they rolled over a bit. And also they underperformed our US AI basket. So we got the timing on that one wrong.
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A new graph has the title "Credit default swap spreads for Illinois and Chicago" and show trends for Chicago 5-year CDS and Illinois 5-year CDS fince June 2025. Both trends show increases after the September 2025 publication of The Blob report.
(SPEECH)
The next one is a funny one to me. Chicago and Illinois have amongst the worst financials among US municipalities. They face the added challenge that most of their unfunded obligations are related to pensions, which are immutable according to state constitutions, rather than based on retiree health care obligations, which are easier to change unilaterally.
Federal stimulus money has run out, and there are declining commercial property values in the Chicago loop, and those resulted in the largest residential property tax hikes in 30 years. The credit markets unfortunately show absolutely no sign of concern about this issue. And as a pie in the face to me, Chicago and Illinois credit spreads have actually tightened since we published the blob Eye on the Market a little over a year ago. So there you go.
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A new graph has the title "Western critical minerals suppliers index" and shows steady growth from January 2025 to the October 2025 publication of the Mad Libs report, after which time the index has not shown the same gains.
(SPEECH)
And another one where the theme was right, the timing was bad, was China introduced new critical mineral export curbs targeting the US. And we thought this would create opportunities in some of the Western critical mineral suppliers. Those gains did take place in early 2025, but by the time we made our recommendation in October, most of the gains had already taken place and that Western critical minerals index is roughly flat since that time.
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A new graph has the title "2026 year to date total returns for major equity markets" and shows percentage growth for the year in 18 markets. Growth in Korea andTaiwan outperformed predictions.
(SPEECH)
And then in terms of missed opportunities, first I'll do equities. While we did a good job highlighting the peak in Korea and Taiwan, even after the corrections, those stock markets are still up a ton this year. And we did not foresee those outsized returns in Korea, Taiwan in the 2026 Eye on the Market outlook. And again, we did a good job calling the top, but we weren't involved from the beginning of the year.
And then we also didn't highlight the possibility of a recovery in small cap. US small cap has recovered this year. It's down a little bit better than US large cap. This thing is like a cicada. It lives underground for 1,700 years and merges. But anyway, it emerged this year, flapped its wings around, and we did not highlight that opportunity.
And then similarly,
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A new graph has the title "Year to date total returns for major fixed income markets" and shows percent growth for 12 products. The Asian and emerging market products outperformed US-based products.
(SPEECH)
there were opportunities this year in Asian and emerging market fixed income, Chinese local currency debt, emerging market local currency debt, Asia high yield, emerging market, local currency bills. All of those things had pretty good years with returns of 4% to 7% while returns on US investment grade bonds and US treasuries were flat. So that was a missed opportunity as well. So that's the end of the report card section.
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A new slide has the title "Seize and Desist, - , the Mamdani residential real estate agenda."
(SPEECH)
I want to close with New York City and what's going on with the mayor's real estate policy. And so in February, I wrote a piece called "Supply and the Mam" with the Mam being Mamdani. And it covered a lot of stuff-- the 1970's debt crisis, New York City residential real estate, all of the strange rules around rent control and rent stabilization, the New York City housing shortage, the new city of Yes zoning regulations that Adam's put in place, New York City budget and borrowing limitations on the mayor that were put in place in the 1970s, property tax rates, scaffolding laws, and then most importantly, some new 2019 rules, which render many renovations deeply unprofitable for landlords.
And with that, we then covered Mamdani's plan to seize properties and transfer them to tenant groups and non-profits. And that's a policy the mayor more explicitly outlined in his May report that was called "Block by Block." And the mayor's policy is simple. As landlords postpone improvements because renovation payback years-- renovation payback periods can now exceed 25 years. The city will then conduct these really detailed a roof to cellar inspections and impose fines, and severely delinquent landlords risk being declared negligent and then subject to having their buildings seized and transferred for public safety reasons.
So I have a lot of questions here
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A chart has the title "Apartment and building improvement filings at rent stabilized properties. One scale shows the number of individual apartment improvements. Another scale shows the number of major capital investments. Both graphs drop after the 2019 Housing Stability and Tenant Protection Act.
(SPEECH)
because-- well, first let's look. There's a chart that we had in back in February that we repeated this time. Look at the impact of this 2019 bill, the Housing Stability and Tenant Protection Act. The major capital investments that were made by property owners collapsed and individual apartment improvements, number of filings completely collapsed.
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A new graph has the title "Operating cost versus rent stabilized rent increases" and contains line graphs for operating costs, 1-year rent increases, 2-year even rent increases, and 2-year odd rent increases. The operating costs graph increases much more than the others.
(SPEECH)
And then what's happened since 2019 is that operating costs have soared compared to the one year and two year rent increases.
So obviously, a lot of landlords are going to postpone making improvements during periods like that. But I have a lot of questions because there's a very checkered history of similar policies taking place in New York. So Mamdani's plan relies on something called New York City Article 7A Program. It was enacted in 1965, and it allows housing courts to appoint administrators to operate what they call effectively abandoned and unsafe buildings.
So in the '70s and '80s, city appointed administrators were the ones that collected rents on around 6,000 buildings, and they redirected those rents towards repairs. But the problem is the rents didn't cover the expenses. So most of these buildings simply accumulated property tax arrears and their conditions remain generally deplorable. Nobody benefited and the city ended up being on the hook on average for 19 years and spent billions in the process.
So I don't know exactly how the Mamdani administration is going to avoid repeating these kind of outcomes without substantial taxpayer subsidies, which so far really haven't been announced or disclosed. And I don't see how this is going to differ from some of the badly managed and chronically underfunded New York City public housing projects. We'll have to see.
I don't understand how the new rent controls, mandatory construction, wage increases, and these property seizures are going to incentivize development of new units. If anything, these policies might prompt some landlords to remove certain buildings from the market entirely, given the risk of appropriation. And so if nobody's living in a building, it can't be expropriated because it's not a risk to any actual tenant. If that's the case, you're going to further increase the stock of the units that are currently held off market.
And just to show how much some of the policies in the Democratic Party have changed, Jason Fuhrman was the former chairman of Obama's Council of Economic Advisors. And a couple of years ago, he was interviewed and he said, quote, "rent control has been about as disgraced as any economic policy in the toolkit," end quote. So what does that imply regarding the medium term impact of the latest round of rent controls in New York City on housing supply and costs? So what are the landlord's going to do?
Well, all seven judges on the New York Court of Appeals were appointed by Democratic governors, so property owners are unlikely to get any relief there. Will they appeal at the Supreme Court and claim some unconstitutional expropriation that is inconsistent with the 14th Amendment Due Process clause? I don't know. But I think at some point, you'll see some coordinated industry response.
I want to close with just one comment on this. And I'm in learning mode, so I haven't made any firm judgments here. But to me, as I read through some of these policies, it makes me wonder, "is this just the beginning of a larger battle between the private sector in New York City and administration, who's director that was appointed by Mamdani, the Director of the Office to Protect Tenants was quoted to saying "home ownership is a weapon of white supremacy masquerading as wealth building public policy, and that it was necessary to impoverish the white middle class."
Those are their quotes, not mine. And so these policies are residential real estate could be the beginning of a longer process. And we'll just have to wait and see how this plays out. But the battle lines are definitely being drawn. Thank you very much for listening. That is the end of the September Eye on the Market. And if you want to know more about tarpon fishing in Trinidad, email me. Bye.
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About Eye on the Market
Since 2005, Michael has been the author of Eye on the Market, covering a wide range of topics across the markets, investments, economics, politics, energy, municipal finance and more.
