Daily Commentary

MarketMinder’s View: We love a good self-debunking article and this one is a prime example. It cites the recent rise in interest rates, especially the 10-year US Treasury yield, to levels unseen since … 2025 … as terribly troubling for equity investors. The reason? “… The so-called equity risk premium [ERP], which is a way to measure equity earnings relative to bond yields. A simple approach is to take the expected profits of the S&P 500 Index and EURO STOXX 50 Index over the next 12 months, divide them by index prices to get a ⁠yield and compare that to long-term government bonds. Between 2000 and 2022 the premium averaged 3.1 percentage points for U.S. stocks and 5.3 points for euro zone peers. Today, those premiums have shrivelled to just 0.3 and 3.5 percentage points, respectively, despite surging AI-fuelled earnings.” This, friends, strikes us as nonsense. Yes, ERPs fell lately as rates rose. But they have been low since mid-2023, when they first pierced one percentage point. Simple fact: ERPs, like all valuation tools, aren’t predictive, not of cyclical turning points, returns or volatility. While ERPs were negative ahead of the 2000 bear market, they were positive before 2008, 2020 and 2022 bear markets. This very column notes below-average ERPs in 2003 and 2004. A bull market launched then. It goes on to note that if yields stay high, “It may be, then, that the S&P 500 is stuck with a near-zero equity risk premium. The experience of the 1980s and 1990s shows this is feasible and can even exist alongside strong equity returns.” So what are we even doing here? Those are two of the best decades for stocks in all of history.

MarketMinder’s View: Upward wobbles in oil prices did reaccelerate Canada’s consumer price index (CPI) from 2.8% in June to 3.0% last month, a hair above the 2.9% consensus forecast, which is unwelcome news that likely adds to many consumers’ inflation angst. But the coverage here, especially in the back half, sensibly notes this is chiefly about gasoline: “Excluding gas, the consumer price index rose 2.2 per cent in July for a third consecutive month, Statistics Canada said. CPI-trim and CPI-median — two measures of core inflation that the Bank of Canada looks at — were a touch higher than expected … Despite some of the shorter-term measures of core inflation picking up a bit, those measures were still within the Bank of Canada's target range ….” Look, you can never know what a central bank will do with interest rates beforehand—these human beings aren’t a market function and could act on biases that rational analysis wouldn’t rate heavily. But with CPI excluding gasoline unchanged again, it is fairly apparent oil prices’ war-driven rise isn’t spilling economywide. Absent that, the case for rate hikes is flimsy, unless you think the central bank can somehow hike its way to speeding oil extraction and refining—or boost the Canadian policy rate enough to force Iran and America to reach a peace deal. Supply shocks like this tend to have a limited effect that drives substitution, not inflation, and they aren’t a call for central bank action.

MarketMinder’s View: Here is yet more evidence that sentiment among global fund managers is running on the hotter side: “Fund managers are bullish — so much so that in the last four years, there have only been two occasions when they’ve been more confident, according to Bank of America’s most recent survey published Tuesday. Cash levels at 3.5% have rarely been this low since the turn of the millennium and the allocation to stocks is also a five-year high.” Now, there have been several other periods this survey registered more bullish readings since 2001 that didn’t correlate to a market top (e.g., 2003/2004, 2010, 2013 and after the One Big Beautiful Bill Act passed in 2025), so don’t automatically presume this lofty read is super bearish. But the findings here, which included that managers are most overweight the US and Emerging Markets, further illustrate the high hurdle confronting US and Tech stocks. By contrast, the same firm’s survey of investors that surrounds the EU showed bullishness ticked down last month and is far less stretched. This is one key reason why we think the likelihood of positive surprise—and leadership—is higher for stocks outside America.