Miles Putnam, CFA® | Oct 01, 2026

The news cycle returned to concerns about AI running amok, as a group of prominent researchers and executives highlighted the speed at which the technology is developing and called for regulation to slow the rapid advance. Ironically, among investors it was the industry’s harshest critics who were the most skeptical of the doom and gloom warnings. Their cynical interpretation is that AI’s current leaders are finding it too expensive to keep competing against thousands of clever startups coming in from all angles. Wouldn’t it be nicer for them if everybody just slowed down and allowed the current incumbents to determine the pace of progress from here? It would be like the Wright brothers deciding that human flight should be limited to ten feet above the ground. The FAA exists for a reason, but it was created 55 years after Kitty Hawk. It has only been about five years since AI started performing impressive acts.

The all-item CPI rose 3.4% in the 12 months through August and is likely to rise further as oil prices have returned to levels last seen when the war in Iran was still daily news. Most analysts favor the core CPI, which ignores food and energy price fluctuations and was 2.4% over the past twelve months. However, we’ll repeat what we said last month energy tends to work its way into core prices with a lag.

Meanwhile, companies have received more than $100 billion of tariff refunds, with an estimated $70 billion more to be returned. The tariffs were inflationary, and it stands to reason that the refunds are disinflationary. This effect might be viewed as a temporary headwind to prices, while energy represents an upward pressure which may or may not be equally temporary depending on what happens next with energy markets.

The Federal Reserve voted to increase overnight lending rates by 0.25% to a new lower bound of 3.75%. The Fed started cutting rates two years ago in September 2024. Coming into the year, expectations had been for continued rate cuts, but stubborn inflation underpinned by constructive economic data and a rising stock market have forced the Fed’s hand.

Long-term rates have not vacillated like the way the Fed has. They have continued to go in one direction: up. The yield on the 30-year Treasury shot up from 1% to 5% from early 2020 to late 2023. As the yield plateaued around that level for two years many analysts projected a future decline. Instead, long yields are on the rise again. The 30-year crossed 5.4% in September. The 10-year crossed 5% for the first time since 2007. Inflation is sticky. Rates are rising. The bond vigilantes are snarling.

Except that’s not the whole story. When pundits refer to rising interest rates they are usually talking about the rates paid by national governments on their sovereign debts. Those rates vary according to forecasts for growth, the value of the national currency, and investors’ assumptions about default risk, which is typically small but non-zero. Generally speaking, sovereign bonds benefit from their sponsors’ tremendous power to tax and to print money. Borrowers without their own prisons, armies, or monetary authorities pay a premium above government rates, called a spread, and those spreads have come down, cushioning the practical economic effects of those headline rate increases.

Mortgage spreads in the U.S. peaked at 3% in early 2023 and are presently below 2%. They could well fall further, as they have spent much of the past thirty years closer to 1.5%. Credit spreads on high-yield, or “junk,” bonds have also narrowed and now sit near the low end of their historical range at about 2.75%, compared with a long-term average of about 5%. These probably don’t have a lot more to give. Investment-grade debt has behaved the same way although on a compressed scale, because yields are lower than junk bonds.

If a rate rises in the forest but nobody pays more interest, does it make a sound? The mortgage market has been cushioned against 1% of the increase in government rates, while corporate borrowers have been cushioned against about 2%. Headlines about housing market pressure could be prescient but currently feel like clickbait. 30-year fixed mortgages at 6.8% are only at about their average of the past 4 years. The same is true for corporate yields, with the exception of the riskiest CCC-rated bonds and below.

From an economic perspective, rising rates are a sovereign government problem. Homebuyers and corporations continue to experience a post-pandemic status quo. Borrowers may be demanding higher yields to compensate for the (mainly) inflationary risks of government bonds, but the practical effect on the real economy remains minor so far. One interpretation is that the stimulative effects of deficits are about as credit positive for borrowers as they are inflationary, and the two forces offset each other.

As the U.S. approaches midterm elections, prediction markets call control of the Senate a coin flip and control of the House a likely Democratic win. President Trump weighed in, promising $5,000 “citizen dividends” to be paid contingent on Republicans retaining both halves of Congress. The price tag would be more than $1 trillion. The bond market understands that this level of fiscal stimulus would complicate the Fed’s job of fighting inflation and place upward pressure on rates.

Deficits are always tomorrow’s problem, but one area where tomorrow is fast approaching is Social Security. The program faces a 22% benefit cut in about five years unless Congress finds a way to increase revenue. Practically speaking, that means higher payroll taxes, with the marginal increase likely to affect high earners disproportionately. The graduated income tax, which is perceived to pay for government services, gets a lot more press, but the much flatter payroll tax, which is perceived to pay for entitlements, is at least as important. We say “perceived” because at the end of the day all taxes are taxes, and all spending is spending.

Accommodative fiscal and monetary policy and torrid reported earnings growth pave the way for steady stock market gains. Investors may wonder at what level all the good news is priced in, and we agree that certain market sectors may be priced beyond perfection. However, valuations do not look unreasonable where the underlying earnings can be sustained. As always, we preach earnings growth and diversification. Don’t let your portfolio become too reliant on the continued strength of the stocks making all the news.