I'm Dan Sheehan, a wealth advisor / financial planner based in Charlotte, NC. I work with high earners, families, and business owners on the things that actually move the needle over a lifetime: building the plan, managing the portfolio, and getting the tax picture right. Most of my clients came to me knowing they were doing well but suspecting they were leaving something on the table. Usually they were. This newsletter is where I share the thinking behind that work, one topic at a time.
Good morning investors,
The 10-year Treasury crossed 5% this morning for the first time since 2007, and that number is the whole story today. It's the level I've pointed to all year as the one that changes the math for stocks, and now we're through it, on the morning the Fed begins the two day meeting that markets have moved to pricing a hike out of at better than 92%. The 10-year sits at 5.04% as I write, the 30-year at 5.38%, and oil keeps pressing with Brent over $107 and WTI above $103 after Saudi Arabia shut a pipeline that bypasses Hormuz.
Futures are lower, around half a percent across the board, extending Monday's decline. The AI slowdown story is still weighing on tech, with Nvidia down another 3% and Corning off 13%, though I'd separate the noise from the substance there, and I'll come to that. First the number that matters.
What 5% Actually Means, and What It Doesn't
The instinct when the 10-year crosses 5% is to treat it as a red line, and there's logic to that. Higher risk-free yields raise the bar equities have to clear. When you can get 5% guaranteed from the government, you demand a higher return from stocks to compensate for the risk, and that usually means paying a lower multiple for the same earnings. This is why rates can matter even when corporate fundamentals are excellent. Earnings can keep rising while the market falls, if the multiple investors will pay compresses faster than earnings grow.
But the level alone doesn't determine what happens next, and the historical record is worth reviewing because it goes against the panic narrative. The last time the 10-year crossed 5%, in October 2023, the immediate equity reaction was negative, the S&P down about 1.2% over the following week. Then it rallied hard, up 8% over the next month, 15% over three months, and 20% over six (Per Josh Schafer). An investor who sold because the 10-year touched 5% avoided a 1.2% dip and missed a 20% recovery. That's the trap in treating a round number as a signal to act.
So the useful distinction is not whether the 10-year touches 5%, but what it does from here. Touching 5% and receding is one thing. Sitting sustainably above it is another. Accelerating toward 6% is a genuinely different environment, the one that would raise mortgage and corporate borrowing costs enough to pressure valuations hard, tighten financial conditions materially, and increase refinancing stress across the economy. We are not there. What matters just as much is why yields are here. A 5% yield driven by resilient growth and strong nominal GDP is a very different animal from a 5% yield driven by disorderly inflation or fiscal stress. Right now it's a mix, real growth and AI investment on one side, energy driven inflation and heavy bond supply on the other, which is exactly why it deserves attention rather than either dismissal or alarm.
There's a comforting signal underneath, too. Corporate bond spreads remain tight, which tells you the credit market isn't pricing distress even with the 10-year at 5%. That matters, because the thing I watch for is the point where rate risk becomes credit risk. As long as high quality borrowers keep issuing without trouble and spreads stay contained, earnings act as a shield. When spreads widen and refinancing gets hard, the shield stops working. The credit market is not flashing that yet.
The Fed Meets Into It
The Fed begins its meeting today with a decision tomorrow, and the market has all but settled on a quarter point hike, the first of the Warsh era. After core CPI came in a touch hot Friday and with core PCE running above 3% every month this year, the hawkish case has the momentum, and Warsh spent Jackson Hole handing it to them.
I've said for weeks I don't think they hike, and I'll be honest that at 92% odds I'm clearly on the wrong side of where the market has landed. My reasoning holds even if the call doesn't: much of this inflation is supply driven, and a rate hike can't produce another barrel of crude or bring $6 diesel down, but I want to focus on the question that actually matters for your portfolio, because whether they move a quarter point tomorrow is less important than what comes after it.
A single 25 basis point hike changes little on its own. The economic damage from tightening comes from the cumulative path, not the first step, and it arrives with a lag. The real question is whether this becomes a cycle. History offers two templates for us to look at that are close to what we are seeing today. In 1997 the Fed delivered a relatively isolated hike and moved on, which is extremely rare. In 1999 it restarted tightening and, finding the economy still strong months later, concluded the early hikes hadn't done enough and added roughly another 75 basis points, the concerning case. A strict 2% target makes a single hike hard to justify as sufficient, which is precisely the pressure that turns one move into several. So the thing to listen for tomorrow is not just the decision but whether Warsh frames this as a discrete step that pre-commits the Fed to nothing, which is what the market wants, or as the opening of a campaign.
Markets tend to price the next move almost as soon as the first lands. If the Fed hikes tomorrow and oil then moderates and inflation cools, yields could fall and investors could start pricing a cut, which would ease financial conditions before the Fed intends. That undercuts some of the tightening the hike was meant to deliver, and it's part of why credibility is such a constraint here. A Fed that hikes and then quickly signals a reversal risks looking like it didn't mean it.
The AI Selloff Is Noise Around a Real Question
The tech weakness this week traces to Amodei's weekend essay calling for the industry to slow the pace of AI development, backed by Altman and Musk. I gave you my full view yesterday and it hasn't changed: the people asking for a slowdown control the pace themselves and don't need anyone's permission to ease off, and a framework that slows the field while raising the bar for competitors looks a lot like moat-building ahead of two historic IPOs. Gil Luria put it plainly, that neither Amodei nor Altman said they are slowing down, only that they will if everyone else does.
Daniel Ives made the point that despite the soap opera, this doesn't move the needle on the roughly $5 trillion being spent on AI over the next few years, and I agree. Nothing about the actual demand changed over the weekend. Trump flatly rejected a slowdown Sunday on the grounds that whoever wins AI wins, China called the safety push fear mongering, and with the midterms approaching, coordinated regulation looks unlikely. A slowdown in how fast models improve is not a slowdown in how much infrastructure gets built, and it's the buildout, the chips, power, and data centers, that drives the earnings I care about. The genuine risk, and it's the one to keep in view, is that a real regulatory slowdown eventually dents the capex trajectory. That would reach the physical layer names. We're nowhere near it, and the Corning down 13% kind of move looks more like a crowded trade unwinding than a change in the fundamentals.
Where the Real Tension Sits
Earnings and productivity are exceptionally strong. Oil, inflation, and bond yields are threatening the multiple investors will pay for them.
The bull case is real and I hold much of it. S&P earnings estimates for next year keep climbing, now around $419 and possibly heading toward $425, and they're rising even as multiples compress, which is the healthy version of a market, profits doing the work rather than exuberance. Unit labor cost inflation near 1.4% suggests productivity is offsetting wage pressure, which lets the economy grow without generating proportional inflation, and the AI buildout keeps flowing into a huge ecosystem beyond tech shares. That's the market of the E point I've made all year, intact.
The bear case doesn't require a recession, and that's what makes it credible. It just requires the math of higher rates. At $425 of earnings, the difference between a multiple in the high 19s and 18x is around 700-750 points on the S&P 500 , a large move in the index from a modest change in what investors will pay, with earnings unchanged. That's the whole game right now. Strong earnings do not automatically produce strong prices if the discount rate keeps rising.
Best regards,
Dan Sheehan [email protected]
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Market Pulse with Dan Sheehan is a personal market commentary newsletter and is independent from my employer. The content is provided for informational and educational purposes only and reflects my views as of the publication date, which may change without notice. Nothing contained herein should be construed as personalized investment, legal, tax, or financial advice, or as a recommendation to buy or sell any security. Any positions discussed represent my own views and may not be suitable for every reader's objectives, financial situation, or risk tolerance. Information is derived from publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Readers should conduct their own research and consult their own professional advisers before making financial decisions.