Since making a new record high on August 13th, US equities faced significant headwinds. Yet, they have managed to rise and fall by no more than 3% over the recent stretch, ending Friday down just 1.0% from their peak.
Now let’s consider what markets have absorbed since August 13th:
And let’s not forget that participants in the AI industry - the industry that accounts for a critical share of current economic growth and future profits - are warning that it may unleash agents that can destroy humanity.
Reuters reported that Anthropic's IPO prospectus, a 261-page document with about 80 pages of risk factors, warned that increasingly powerful AI systems could pose "catastrophic or existential risks to humanity."
Meanwhile, Anthropic postponed the timing of its IPO. OpenAI says it cancelled release of its latest model as it didn’t meet safety concerns. In the bond market, yields on Oracle’s 10-year investment grade debt have surged to about 7.5%, about 90 basis points above comparable corporates.
In short, the fact that equity markets are where they are is remarkable.
At a basic level, investors are balancing record high corporate profits with major concerns about rising interest rates and major concerns about the AI engine powering the economy. That is not an easy task.
Yet set in a historical context, markets are behaving much as one would expect as we absorb a tightening of monetary policy amid a growing economy. Equities are absorbing the blow while yields move up across the curve with minimal yield curve flattening (see figure 1).
It may seem counter-intuitive amid this year’s rate panic, but a collapse in US Treasury yields would likely be a sign of future economic distress, particularly if accompanied by sharply widening credit spreads.
With a widening of possible outcomes, CIO Group moved toward a neutral view on global equities August 31, even as we are optimistic on corporate profit growth for the coming year.
For now, the Fed’s rate hikes appear to be “catching up” with the profit boom. Lower inflation (some positive signs were reported last week) would certainly be a welcome driver of a Fed pause. Yet when a peak in corporate profits is viewed as highly likely, markets will be far more negatively impacted, even if it results in the Fed reversing course and easing (see figure 2).
Earnings reports and guidance will flow strong beginning in two weeks. US mid-term election results will ideally be known in just over a month. With major events ahead, the current anxiety before clarity is not unusual.
But while there is more room for rising corporate earnings to boost equities beyond the near-term (see figure 3), the opportunity cost of taking equity risk has indeed risen. The reason? Fixed income alternatives have become far more attractive (see figure 4).
Two-year US Treasury yields have risen from 3.5% to 4.85% since the start of this year. Floating rate corporate securities of various quality yield between 4.9% and 6.7% with very little price sensitivity if bond yields rise further. Our preferred ultra-short duration corporate portfolio has seen yields steady near 5.5% while economic risks have increased. A mix of high and lower grade municipal debt yields 4.2%, which is a 6.8% taxable equivalent yield for fully taxed US payers.
Looking back at substantive elections, like this year’s mid-terms, we also find near term comfort in the fact that simply having the results “in” tends to calm markets (see figure 5). While US mid-term pre-election periods have shown only slightly below average probability of rising, a full 90% of post-election periods have seen rising US shares in the subsequent three months (the same is true for elections since 1950).
The recent increases in yields in 2026 are far less substantial than the shocking rise of 2022. But unlike 2022, “boom risks” are building up in the economy (see figure 6).
While we believe that equities can outperform bonds in 2027, the 16-year period of continuous outperformance without a substantial setback is unlikely to be sustained.
When one segment of the economy booms to the extent that AI hardware has over the past three years, there is a natural limit to growth. Historically, infrastructure booms typically overbuild and lead to overborrowing. For those most exposed, returns on investment can fall precipitously. The ripple effects are likely to be large across many industries whose atypical growth in profits will decelerate.
This is why CIO Group is building greater balance to portfolios. For us, the rewards of higher yields are two-fold, more income now and a better hedge when equities suffer.
This material has been prepared by CIO Capital Group, LLC (“CIO Group”) for informational purposes only and does not constitute investment advice or an offer to buy or sell any security or the solicitation of an offer to buy any security or investment advisory service. All opinions are subject to change without notice. Past performance is not indicative of future results. Investment returns may vary significantly over time. Indexes are unmanaged, are not available for direct investment, and do not reflect the deduction of fees or expenses. This material has been prepared without regard to the specific investment objectives, financial situation, or particular needs of any individual investor.
CIO Group believes that the information obtained from third party sources contained herein is reliable, but no representation or warranty is made regarding its accuracy or completeness. CIO Group accepts no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission, or inaccuracy in such information and for results obtained from its use.
Certain information contained herein constitutes ‘forward-looking statements’ which are based on current expectations, estimates, projections, and beliefs. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Any forecasts, projections, estimates, or market expectations are based on current assumption and should not be considered guarantees of future events or investment results.
References to portfolio positioning, asset allocation, sectors, or investment strategies reflect CIO Group's views as of the date of publication and should not be interpreted as recommendations to purchase or sell any particular security or investment strategy.
CIO Group is an investment adviser registered with the SEC. Copyright ©2026 CIO Group. All rights reserved.