~ Un-Common Sense In An Irrational World: We Challenge the Conventional WisdomTM ~
FROM THE DESK OF DR. PAUL M. WENDEE
THOUGHTS ON THE ECONOMY AND THE MARKETS
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Current Market Commentary: Strong Earnings, Expensive Assets, Geopolitical Risk and a Growing Fiscal Shadow
As of Wednesday, May 27, 2026, approximately 12:50 p.m. Pacific Time. Market prices cited for today are intraday and may change before the close.
Executive Perspective
The financial markets are being pulled in opposing directions. On one side, corporate earnings—especially from companies connected to artificial intelligence, semiconductors and data-center investment—remain exceptionally strong. That earnings strength has pushed the S&P 500 and Nasdaq near record highs and has helped investors look beyond geopolitical turmoil, inflation and rising long-term interest rates.
On the other side, the foundations supporting higher stock valuations are becoming less forgiving. Oil prices have been driven sharply higher by the conflict involving the United States, Israel and Iran and the disruption of shipping through the Strait of Hormuz. Inflation has reaccelerated. Bond yields remain elevated. Federal debt held by the public has now exceeded annual U.S. GDP for the first time since the immediate aftermath of World War II. And the additional yield investors receive for owning stocks rather than Treasury securities has become unusually small.
The result is not necessarily an imminent bear market. It is a market in which the price of optimism is high, the margin for error is narrower, and disciplined diversification is increasingly important.
What Are the Markets Doing Now?
Stocks: Near Records, Led by Earnings and Artificial Intelligence
U.S. equities remain remarkably resilient. On Tuesday, May 26, the S&P 500 closed at 7,519.12, a record high and up approximately 9.8% year to date. The Nasdaq Composite closed at a record 26,656.18, up approximately 14.7% year to date. The Russell 2000, representing smaller companies, was up about 17.7% year to date, while the Dow Jones Industrial Average closed at 50,461.68. (AP News)
During trading on May 27, equities were relatively steady near those record levels. A representative S&P 500 exchange-traded fund, SPY, traded at approximately $750.41, essentially unchanged on the day at the time observed.
Stock market information for SPDR S&P 500 ETF Trust (SPY)
- SPDR S&P 500 ETF Trust is a fund in the USA market.
- The price is 750.41 USD currently with a change of -0.18 USD (-0.00%) from the previous close.
- The latest open price was 750.82 USD and the intraday volume is 29730411.
- The intraday high is 753.71 USD and the intraday low is 748.249 USD.
- The latest trade time is Wednesday, May 27, 12:50:23 PDT.
The stock market’s strength is not simply speculative enthusiasm. Strong corporate earnings are providing genuine fundamental support. Goldman Sachs raised its year-end S&P 500 target to 8,000, citing expected S&P 500 earnings of $340 per share in 2026, representing approximately 24% earnings growth. Artificial-intelligence infrastructure companies are expected to account for about half of this year’s earnings growth. (Reuters)
Nevertheless, the market has become increasingly dependent on continued earnings acceleration from a relatively concentrated group of technology and AI-related businesses. That concentration is not automatically dangerous, but it does mean that disappointment in AI spending, margins or expected productivity benefits could have an outsized effect on the broad indexes.
Bonds: Higher Yields Reflect Inflation and Fiscal Concern
The bond market is sending a more cautious message than the stock market. The Federal Reserve maintained its federal funds target range at 3.50% to 3.75% following its April 29 meeting. However, market interest rates remain elevated because inflation has revived and long-term fiscal concerns have intensified. (Federal Reserve)
On May 27, the 10-year Treasury yield traded around 4.48%, down modestly on the day as oil prices fell. The 2-year Treasury yield was approximately 4.03%. Earlier in May, the 30-year Treasury yield reached approximately 5.20%, its highest level since 2007, reflecting growing sensitivity to inflation, deficits and federal borrowing requirements. (Barron’s) (Barron’s)
Long-term Treasury bond prices rose modestly today as oil declined: the iShares 20+ Year Treasury Bond ETF, TLT, traded around $85.32, up approximately 0.25% intraday.
Stock market information for iShares 20+ Year Treasury Bond ETF (TLT)
- iShares 20+ Year Treasury Bond ETF is a fund in the USA market.
- The price is 85.315 USD currently with a change of 0.22 USD (0.00%) from the previous close.
- The latest open price was 85.26 USD and the intraday volume is 19346002.
- The intraday high is 85.62 USD and the intraday low is 85.15 USD.
- The latest trade time is Wednesday, May 27, 12:50:44 PDT.
Bond investors appear to be distinguishing between two competing forces. A decline in oil prices may ease immediate inflation anxiety and support bonds. But persistent deficits, rising interest expenses and continuing geopolitical risks place upward pressure on long-term yields.
Credit markets, meanwhile, appear unusually calm. The ICE BofA U.S. High Yield Option-Adjusted Spread stood at only 2.72 percentage points on May 26. That is a relatively narrow premium for owning below-investment-grade corporate bonds rather than comparable Treasury securities. Narrow credit spreads indicate that investors are currently demanding limited compensation for default and economic risk. (FRED)
Oil: The Most Immediate Geopolitical Pressure Point
Oil has become one of the most important variables in the investment outlook. Conflict involving Iran and disruptions affecting the Strait of Hormuz—one of the world’s most important energy transportation routes—drove oil sharply higher earlier this year. The effect was visible throughout the economy: gasoline prices, transportation costs, inflation expectations, bond yields and consumer sentiment all reacted.
On May 27, oil prices declined sharply on hopes that negotiations could result in the reopening of the Strait of Hormuz. West Texas Intermediate crude fell approximately 5.5% to about $88.68 per barrel, while Brent crude declined approximately 4.6% to about $92.25 per barrel. (AP News)
A representative oil ETF, USO, declined approximately 4.2% intraday.
Stock market information for United States Oil Fund (USO)
- United States Oil Fund is a fund in the USA market.
- The price is 131.19 USD currently with a change of -5.81 USD (-0.04%) from the previous close.
- The latest open price was 131.39 USD and the intraday volume is 7875253.
- The intraday high is 133.67 USD and the intraday low is 128.87 USD.
- The latest trade time is Wednesday, May 27, 12:50:41 PDT.
This decline is welcome from an inflation perspective, but investors should not mistake a one-day price move for a permanent solution. Oil prices are now unusually sensitive to military developments, negotiations, shipping access and supply security. If the Strait of Hormuz remains impaired or conflict escalates again, oil could quickly renew upward pressure on inflation and interest rates.
Gold and Other Significant Markets
Gold has also become a revealing indicator. Normally, war, inflation and fiscal instability support gold prices. Yet gold declined on May 27, with spot gold falling approximately 1.3% to around $4,447.71 per ounce. The principal reason is that investors increasingly expect elevated inflation to keep interest rates high or potentially lead to additional monetary tightening. Gold tends to face pressure when real or expected interest rates rise because it produces no income. (Reuters)
The SPDR Gold Shares ETF, GLD, traded down approximately 1.3% intraday.
The dollar has remained comparatively firm, while cryptocurrency markets have been volatile; bitcoin traded around $75,946 on May 26 after declining approximately 1.6% that day. These markets reflect the same broad conflict: demand for alternative stores of value exists, but higher interest rates and a relatively firm dollar restrain speculative and non-income-producing assets. (Reuters)
The Major Current Events Affecting Markets
1. The Iran Conflict and the Strait of Hormuz
The most immediate market-moving event is the conflict involving the United States, Israel and Iran, together with disruption to energy transportation through the Strait of Hormuz. The conflict has affected oil supply expectations, shipping, inflation forecasts, consumer costs and the bond market.
The market response has been direct:
- When conflict or supply disruption appears likely to continue, oil rises, inflation expectations increase and bond yields tend to rise.
- When negotiations appear promising, oil falls, bond yields ease and equity markets generally improve.
- The industries most affected include airlines, cruise operators, transportation companies, manufacturers and energy-intensive businesses.
Today’s market action is an example: oil prices declined sharply on diplomatic hopes, while airline and cruise stocks rose because lower fuel costs improve expected profitability. (AP News)
2. Inflation Has Reaccelerated
Inflation is once again a meaningful problem for markets. In April, the Consumer Price Index increased 0.6% for the month and 3.8% over the prior twelve months. Core CPI, excluding food and energy, increased 2.8% over the prior year. Energy prices rose 17.9% year over year, while gasoline prices increased 28.4%. (Bureau of Labor Statistics) (Bureau of Labor Statistics)
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures Price Index, increased 3.5% year over year in March, while core PCE inflation increased 3.2%. The next PCE release is scheduled for May 28 and will be closely watched by investors. (Bureau of Economic Analysis) (Bureau of Economic Analysis)
Inflation matters to investors because it can simultaneously damage bonds and stocks. It reduces the purchasing power of fixed-income payments, raises interest rates, pressures corporate margins and lowers the valuation multiples investors are willing to pay for future earnings.
3. Artificial Intelligence Earnings Continue to Support Equities
The positive counterweight is corporate profitability. Companies benefiting from AI investment, computing infrastructure, chips, memory and data-center demand have continued to generate unusually strong earnings results. This strength has allowed the stock market to remain resilient despite war, oil-price volatility and rising interest rates.
This is important: the market is expensive, but it is not rising without an earnings foundation. FactSet reported in early May that analysts were forecasting approximately 21% earnings growth for calendar year 2026, while the S&P 500 forward price-to-earnings ratio stood around 21 times expected earnings. (FactSet Insight)
The risk is that expectations have also risen sharply. When valuations are elevated, good results are no longer enough; companies must continue to produce excellent results.
4. The Federal Debt Burden Is Moving From a Long-Term Issue to a Market Issue
For many years, investors could discuss federal debt as a serious but distant problem. That is changing. Large deficits, higher interest rates and rising debt service are increasingly relevant to Treasury yields, mortgage rates, equity valuations and the dollar.
The Congressional Budget Office projects a federal budget deficit of approximately $1.9 trillion in fiscal year 2026, equal to 5.8% of GDP. CBO projects that debt held by the public will rise from approximately 101% of GDP in 2026 to 120% of GDP by 2036, while annual net interest costs will rise materially. (Congressional Budget Office) (Congressional Budget Office)
Market Valuation and the Diminishing Risk Premium
The most important valuation issue today is not merely that stocks are expensive. It is that stocks are expensive at a time when investors can once again earn meaningful yields from Treasury securities.
In early May, the S&P 500 traded at approximately 21 times forward earnings, above its five-year average of 19.9 and its ten-year average of 18.9. A price-to-earnings ratio of 21 implies a forward earnings yield of approximately 4.8%. (FactSet Insight)
At the same time, the 10-year Treasury yield is close to 4.5%. A simplified measure of the equity risk premium—the S&P 500 earnings yield minus the 10-year Treasury yield—therefore stands at only a few tenths of a percentage point. Axios reported the earnings yield at approximately 4.73% and the 10-year Treasury yield at approximately 4.56%, leaving a spread of only about 0.17 percentage points. (Axios)
That is a very small apparent premium for accepting the uncertainties associated with equity ownership: earnings risk, valuation risk, recession risk, geopolitical risk and business risk.
This does not mean that investors should automatically sell stocks and buy bonds. Stocks provide long-term participation in business growth, innovation, productivity gains and inflation-adjusted earnings. Bonds generally do not provide the same growth potential.
But the diminishing risk premium does mean that:
- Future stock returns may be more modest than recent returns.
- Diversified bond allocations are more attractive than they were during the zero-interest-rate period.
- Speculative or highly valued stocks require greater scrutiny.
- Investors should be cautious about assuming that recent AI-driven market gains will continue indefinitely at the same pace.
An additional warning comes from credit markets. High-yield bond spreads are also narrow, suggesting that investors are demanding relatively little compensation for lower-quality credit risk. When both equity and credit risk premiums are compressed, markets can be vulnerable to sudden repricing if economic or geopolitical conditions deteriorate.
U.S. Debt Has Surpassed GDP: What Does It Mean?
There are two different debt concepts that should be distinguished.
Gross federal debt includes debt held by the public plus debt held within government accounts, such as certain trust funds. Gross federal debt exceeded the size of annual GDP years ago; Treasury explains that the gross debt-to-GDP ratio surpassed 100% in 2013. As of May 22, 2026, gross federal debt was approximately $39.11 trillion. (Fiscal Data) (TreasuryDirect)
Debt held by the public is the more economically significant measure because it represents Treasury securities held by investors, financial institutions, the Federal Reserve and foreign holders. This is the debt that directly competes in capital markets with private borrowing.
At the end of the first quarter of 2026, federal debt held by the public reached approximately $31.27 trillion, while annual U.S. GDP totaled approximately $31.22 trillion. Thus, debt held by the public reached approximately 100.2% of GDP. This is the significant new milestone. (CRFB)
Historical Perspective
The United States has experienced a public debt burden above or near the size of GDP before, most notably following World War II. Public debt reached approximately 106% of GDP in 1946 as the country emerged from the enormous costs of financing the war. Thereafter, rapid economic growth, moderate inflation, fiscal restraint and a favorable demographic environment caused the debt ratio to decline materially over subsequent decades.
Today’s situation is different in important respects.
After World War II, the debt spike reflected an extraordinary but temporary national mobilization. Today’s debt growth largely reflects continuing structural deficits associated with entitlement spending, interest expense, defense requirements, tax policy and repeated fiscal imbalances during both strong and weak economic periods.
The CBO currently projects that debt held by the public will rise to 120% of GDP by 2036, exceeding the post-World War II record, and could rise to 175% of GDP by 2056 under current-law projections. (Congressional Budget Office) (Congressional Budget Office)
What Does a Debt-to-GDP Ratio Above 100% Mean?
It does not mean that the United States is immediately insolvent or that a crisis is unavoidable. The United States issues debt in its own currency, has deep and liquid capital markets, owns substantial productive resources and continues to benefit from the dollar’s global reserve-currency role.
However, it does mean that the country has less fiscal flexibility and greater exposure to interest-rate changes.
A high and rising debt ratio can create several problems:
- Higher interest expense. When Treasury securities mature and must be refinanced at higher yields, federal interest costs rise.
- Pressure on long-term rates. Large government borrowing needs can increase Treasury yields, mortgage rates and corporate borrowing costs.
- Reduced policy flexibility. In a future recession, war or financial crisis, the government may have less room to borrow aggressively without unsettling markets.
- Crowding out. Government borrowing may compete with private investment for available savings and capital.
- Inflation and currency risk. Investors may demand higher yields if they become concerned that policymakers will tolerate inflation or currency depreciation to reduce the real burden of debt.
- Lower valuation multiples. When Treasury yields are higher, investors generally pay less for long-duration assets such as growth stocks.
The debt milestone is therefore not a prediction of immediate disaster. It is a signal that fiscal policy has become an investment variable that can no longer be ignored.
What Should Long-Term Investors Do?
The proper response is not panic. Long-term investing has always required dealing with wars, inflation, recessions, elections, debt scares, technological disruptions and periods of excessive optimism. Investors who continuously move entirely in and out of markets based on headlines often incur taxes, transaction costs and the substantial risk of missing recoveries.
But a long-term approach does not mean ignoring valuation or risk. It means managing risk deliberately while remaining invested in productive assets.
1. Maintain a Diversified Long-Term Portfolio
A diversified portfolio remains the first line of defense. Investors should avoid becoming overly dependent on one market theme, one sector, one country, one duration exposure or one economic outcome.
U.S. equities remain important because ownership of profitable businesses is one of the best long-run ways to participate in economic growth and protect purchasing power. However, current valuations argue for balance rather than excessive concentration in the most expensive portions of the market.
2. Recognize That Bonds Again Offer Meaningful Income
During the zero-interest-rate period, bonds often provided limited prospective return. That is no longer true. Treasury yields near 4% to 5% provide a meaningful source of income and portfolio stability for investors who can hold securities to maturity.
Long-term investors should distinguish between:
- Short- and intermediate-term high-quality bonds, which currently provide income with less duration risk;
- Long-term bonds, which can provide substantial gains if rates decline, but can also suffer meaningful losses if inflation or fiscal concerns push rates higher;
- Lower-quality corporate bonds, where narrow spreads suggest relatively limited compensation for taking additional credit risk.
3. Be Selective About Equity Valuation
High-quality companies can remain good long-term investments even when the overall market is expensive. But valuation matters. Investors should be especially careful with businesses whose prices assume exceptionally high growth, expanding margins or permanent dominance from current AI trends.
The important question is not whether AI will matter; it plainly does. The important investment question is whether the earnings ultimately produced will justify the prices currently being paid.
4. Keep Adequate Liquidity and Rebalance Periodically
Volatile periods create opportunities for investors who have liquidity and discipline. Investors should maintain an appropriate reserve of cash or high-quality short-term securities for near-term obligations, avoiding the necessity of selling risky assets during sharp declines.
Periodic rebalancing—selling some assets that have substantially appreciated and adding to areas that have lagged—can impose discipline without requiring investors to forecast short-term market movements.
5. Consider Inflation Sensitivity and Real Assets Carefully
Energy disruption and fiscal risk reinforce the importance of thinking about inflation protection. Inflation-sensitive assets may include Treasury Inflation-Protected Securities, certain real assets, infrastructure, energy exposure, real estate and selected alternative investments.
However, these assets also carry risk. Oil and gold, for example, can be extremely volatile and can decline sharply when geopolitical fears subside or interest rates rise. They should generally be viewed as components of a diversified portfolio rather than substitutes for a complete investment strategy.
6. Avoid Market Timing Based Solely on Headlines
The current environment contains many reasons for caution: war, oil disruption, renewed inflation, expensive equities, thin risk premiums and unsustainable fiscal trends. Yet corporate earnings remain strong, technology continues to create genuine economic value, and markets can continue rising even when risks are clearly visible.
A long-term investor should therefore avoid two opposite mistakes:
- Assuming that high recent returns will continue without interruption; and
- Abandoning long-term investment plans because current risks appear unusually serious.
The sensible approach is to remain invested, diversified and valuation-aware; maintain adequate liquidity; use bonds and other defensive assets where appropriate; and be prepared for lower returns and greater volatility than investors have recently enjoyed.
Conclusion
The present market is neither purely irrational nor comfortably safe. Stocks are being supported by strong earnings, particularly from the AI and technology complex. Bonds now offer meaningful yields, but those yields also reflect renewed inflation and mounting fiscal risk. Oil prices have become a transmission mechanism through which geopolitical conflict affects household costs, Federal Reserve policy, bond prices and equity valuation. Gold, credit spreads and the dollar each reflect different aspects of this same uncertainty.
Most importantly, the United States has crossed an important fiscal threshold: debt held by the public now exceeds annual GDP. That event does not signal immediate financial collapse, but it does suggest that future returns, interest rates, inflation and government policy will be more tightly intertwined than they have been in recent decades.
For long-term investors, the lesson is not to retreat from markets. It is to invest with discipline: diversify broadly, demand reasonable valuations, recognize the renewed value of high-quality fixed income, maintain liquidity, rebalance thoughtfully and avoid allowing either fear or enthusiasm to replace a sound investment plan.
IMPORTANT NOTE: Artificial Intelligence, Source Use and Investment Commentary Disclosure
This commentary was prepared with the assistance of artificial intelligence (“AI”). AI can assist in organizing information, summarizing reported data, identifying relevant issues and developing analytical discussion. However, AI is not infallible. It may make factual errors, rely on incomplete, inaccurate or outdated information, misunderstand source material, omit important considerations, or reach conclusions that are incorrect, inappropriate or inconsistent with subsequent events. Market conditions, economic data, geopolitical developments, interest rates, asset prices and government fiscal information may change rapidly after the date of publication.
Although reasonable efforts were made to review the information presented, readers should independently verify material facts, statistics, market prices, quotations, source citations and conclusions before relying upon this commentary. Nothing in this commentary should be construed as individualized investment, legal, tax or accounting advice, or as a recommendation to purchase, sell or hold any particular security or investment. Investment decisions should be made in light of each investor’s objectives, risk tolerance, time horizon, liquidity needs and circumstances, and, where appropriate, in consultation with qualified professional advisers.
The AI system did not intentionally copy the commentary’s analysis, conclusions or investor guidance word for word from any other source. Several distinctive sentences from the commentary were checked against identified source materials, and no sentence-level verbatim matches were found for the analytical prose. The commentary does, however, incorporate factual information, market data, economic statistics, official terminology, reported forecasts, source titles and other attributed material derived from or based upon identified public sources. Such factual or sourced material should remain properly cited where the commentary is published or distributed.
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