The Run in Rates 9/25/26

Halftime Report

The episode explores the impact of rising interest rates and volatile oil prices on equity portfolios. The Investment Committee discusses th

Key takeaways

• The 10-year Treasury yield has reached multi-year highs near 5.17%, creating competition for equities.
• Meta is approaching a $2 trillion market cap, supported by AI infrastructure and consumer apps like Muse.

Main topics

• Interest Rate Volatility
• AI and Technology Infrastructure

Notable quotes

The 10-year is competition, except for the greed factor.

Conclusion

Investors should balance high-growth AI and cybersecurity opportunitie

Transcript preview

Speaker 1 (0:00) From gas prices to housing prices, from government spending to consumer spending, from the AI boom to the data center backlash, how will this election hit your pocketbook and your portfolio? Continuing coverage, the economy election, CNBC. I'm Scott Wapner, and you're listening to CNBC's Halftime Report, the podcast, the most profitable hour of the trading day. We record this live weekdays at 12 Eastern. Listen in. Speaker 2 (0:30) Thank you, Carl and Leslie. Welcome to the Halftime Report. I am Frank Holland in for the judge, Scott Wapner. Front and center at this hour, the running rates and what it means for your portfolio. The investment committee is standing by right here at Post 9 with how they're playing it. Joining me for the hour, we have Steve Weiss, Kevin Simpson, and Rob Seachin. Before we get started, quick check of the markets. Taking a look. A lot of green on the board right now, you can see. The Dow is up more than 300 points. The S &P up a third of 1%. The NASDAQ up just under a half a percent. But you also have to look at the 10-year right now at 5.17%, hitting multi-year highs. And really, I think that's where this conversation has to start, Steve. Rates right now, are they competition for equities right now? Or are they just something that we have to be in mind of? Because you see a lot of notes out here is that the reaction of rising rates hasn't been as severe, at least to the downside it has been in previous years. Speaker 7 (1:20) Yeah, I think what the market's focusing on at this point is more oil than it is focusing on rates. And to me, that's a mistake. So I think ultimately, rates are going to continue to go higher, even if we come to an agreement with Iran, which is highly, highly unlikely, at least one that actually is executed. And that's part of why the market's up also today. Speaker 7 (1:44) You know, it's going to take a long time to get oil back to where it was in terms of what it actually means, rather than the commodity trading that we're seeing in terms of what it means to the economy. So right now, all we see are rising costs. We see a Fed that's definitely on a tightening schedule. You just don't tighten once. And by the way, 25 bps does nothing if you attack inflation. So I think the market should not be ignoring rates because I do believe that right now the 10-year is competition, except for the greed factor. So you continue to see, and what's not going to be disintermediated here, is AI spending. We hear that time and time again. Now, we'll hear it again when Micron reports in about a week. And so I think that the market, it's sort of OK, but, you know, and I bought some stocks that had gotten really trash. But I'm not putting new money into this market here, not with where rates are going. Historically, the correlation is pretty strong, particularly over a 5%, 10-year Speaker 2 (2:45) that's going higher. You're talking about a 5%, 10-year. I've actually been talking to a lot of investors, wrote a story for CNBC Pro. Kevin, I want to bounce this off of you. If you look at the one month, almost at a 4 % yield. So if you want to sit out some of these AI uncertainty issues, oil prices rising, you can actually just lend the government money for a month and get almost 4%. That seems to be a bit of a headwind for the equity markets. Speaker 3 (3:07) Well, I think it has to be a bit of a headwind for the equity markets. I don't want to sound overly bearish. When I was here last week, I said that I think the bar is getting a little bit higher. The threshold for risk is getting a little bit higher. And every time that the yield goes up on the... You mentioned the one month. I was going to say the 10-year. But every time that yield gets higher, I think that bar gets a little bit higher. And it's interesting. The two things that I have on my ticker next to the S &P 500 is the yield on the 10-year and the price of oil. And I think both of those things, we're seeing the inverse trade. If they're moving higher, risk is coming off. If they're moving lower, then we're seeing risk gone. If they're moving higher in tandem, I think it's a little bit of a one-two punch because you have to worry about margins. All kinds of things get affected. But for me, to think about what could go right. What could go right is some resolution in the Middle East. If energy prices come down, that takes a lot of pressure off of it. But if it doesn't, then I think that 30-day 4 % feels pretty good. Speaker 2 (4:05) Yeah, I think a lot of investors think that's pretty good. So you're talking about what could go right. Right now, we're looking at Brent crude at 106. We're looking at WTI at 94. Seems like people are seeing the potential, at least, of a lot to go wrong with the oil price to stay in that elevated. Speaker 5 (4:19) Well, because it's gone wrong several times before. Every time we think we're on the precipice of a deal, it doesn't happen. And so that has to be a persistent worry. to Steve's point. I do think the big story in the market, though, is rates. I actually think that the Fed has no aspiration to break the market because breaking the market would break the economy. And here's why that is. So many people are taking the wealth effect that they've achieved from being investors in the market and investing in the real economy every day. I think the biggest threat to ongoing prosperity. is a collapse in the market. Now, the beauty of this is the constituents of the market that make up most of the market construct, when you're talking about the S &P 500, are as strong as it gets. Many have re-rated quite dramatically because their earnings have outpaced the price achievements that they've seen. And so multiples have compressed. And so I think there's a bit of a buffer there. So I think the Fed does have room to tighten without hurting that segment of the market. market. Now, other segments of the market are going to be much more sensitive to rates than those segments. And so the beauty of that is they're much smaller constituents of the market. And so you have this push and pull that I think is really important to driving the ultimate outcome, which is likely we're worried about a lot, but earnings continue to deliver. in the segments that matter, allowing the Fed to get some control and time for the Middle East issues to get settled. Speaker 7 (5:58) So how long would the market have to be on its butt, you know, to affect, you know, the economy? We've seen lots of declines in the market. We've seen 10, 20 percent in their V-shaped recoveries. I don't think there's a condition. you know i i Speaker 5 (6:15) think there's a condition out there that's persistent now uh... by the depth i would agree with you that it's pretty tough to uh... it's pretty tough to break the back of the market. But rest assured, we definitely do not want that to happen. We don't want there to be a bad reason for rates to start to come in. And I will tell you for certain, that is not what the Fed wants in this case. Speaker 2 (6:39) You know, the consensus seems to be you guys are saying there's a lot of problems, but you feel pretty constructive about the market. I want to bounce something off you. Coming from Citi, Scott Croner. I didn't say that. I didn't say I Speaker 7 (6:48) feel Speaker 2 (6:48) upset. I Speaker 7 (6:49) said Speaker 2 (6:49) I'm not putting any more money into the market. Yeah, but you don't seem overly concerned. Speaker 7 (6:53) Well, I do have concerns about the 10-year, but if I were, you know, not concerned about anything, I'd be... putting more money into the market. That's fair. We hit on Speaker 2 (7:02) the fact, you said there's Speaker 7 (7:03) a Speaker 2 (7:03) number of issues, but you don't seem overly concerned. You feel like there's an opportunity for a path forward that's at least positive. I Speaker 1 (7:08) want Speaker 2 (7:08) to bounce this off you, Weiss, since you want to chime in. Citi, Scott Croner and his team putting this out. Scott coming up on closing bell just a bit later. The title is Near the Boiling Point. So I think that's Speaker 1 (7:17) a Speaker 2 (7:17) bit more extreme than where you're sitting right now, right? Near the Boiling Point. Macro headwinds are rising, growth remains resilient, earnings momentum is still positive, and the economy's sensitivity to higher rates appears lower than past cycles, as I mentioned earlier, leaving us still overweight equities relative to fixed income, but we acknowledge that the balance of risk has become less favorable. So I don't think you're at the boiling point, are you? No, not at the boiling point. And Speaker 7 (7:40) keep in mind that when analysts and strategists put out things, they're looking for eyeballs, and you don't get it that, hey, nothing, you know, headlines not. nothing to see here move along, like the famous British saying. Look, there are definitely headwinds, but there are always headwinds to every market. Now, the reason why rates aren't hitting this market as much as others, because the spenders, right, those that are deploying the CapEx and the investment dollars are extremely well-funded companies that can borrow below market rates. I'm talking about the Metas. I'm talking about all the others. So the problem here is that... with the spending that's going versus prior cycles, whereas industrial spending, CapEx spending, is now all driving, is being driven by AI. So that's just an important differential. Yeah, Speaker 2 (8:28) to your point, by the way, Michael Hardnett from Bank of America coming out saying he sees growth outperform cyclical. It's going into the midterms, air as he likes, Mag 7. Part of your thesis is that they have lower borrowing costs. Biotech, which I don't think they have lower borrowing costs, but small caps and REITs. Kevin? Yeah, Speaker 3 (8:44) I think the previous note, the word that kind of hit me was resilient. And I think immunity is different than resilient. The markets are resilient. but they're not immune to this market if interest rates continue to move higher and higher. And it's not because the fundamentals aren't good. They are. It's not because earnings aren't great. They are. But it's because the quant funds are going to move from risk on into a risk-free rate. You talked about a 4 % on the 30-year. If you can get 5.5%, imagine that on a 10-year, you're going to see money move into it. It's not going to come from private credit or private equity. It's going to come from equities. And it's not an all-or-some gain, but I think it's something you need to be aware of. So we're being a little bit... bit more conservative, definitely not a boiling point, maybe not as pessimistic as Steve, but we're raising liquidity. We're tightening up the risk profile of the portfolio, writing a lot of covered calls here. So I think we're prepping for some bad news. And if it doesn't happen, well, great. But I think it's better to be prepared now than to think about it after the fact. Speaker 2 (9:40) So, by the way, I was talking about the one month. You look at the 30-year, almost at 5.5%. See you. Speaker 5 (9:45) You know, the consensus out there is that earnings are going to continue to save us. And I believe that earnings are incredibly strong. And I'm squarely in that consensus. But I hate being in the consensus, right? If everybody's on the same side of the ledger that earnings are going to deliver, high rates aren't going to matter, eventually there is a fracture point. So we do have to maintain control of the long end of the curve. I would say. You know, we've had, you have to pay attention to the fact that we've had a multi-standard deviation move in interest rates. Some of that may have been pulled forward. I'm hoping that is the case, right? That the rhetoric on multiple more hikes that Steve says once they hike once, they continue to hike, that's proven to be historically true. But a lot of times the market doesn't pull forward that move into pricing the way we've seen it pull forward into pricing. So we might be at a point where you actually see rates at a level that can be modestly constrictive. You get a little