Making Sense: August Market Update

Making Sense

Market Update | August 2026

Recorded August 26, 2026

Amy: Hello, everyone. I'm Amy Thomas. Today is Wednesday, August 26, 2026, and I want to welcome you to the First Citizens monthly market update series. Today, Brent Ciliano and Phil Neuhart will take a deep dive into what's happening in the markets and the economy.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This should not be considered as tax, legal or investment advice. And with that, Brent, I'm happy to turn it over to you.

Brent: Well, thank you, Amy, and good afternoon, everyone. Hope all of you are well. Phil, it's exciting to be back in the chair with you. I miss doing this.

Phil: It's good to have you back.

Brent: Yeah, well, thank you very much. We've got a lot to cover today. It's been a lot going on. So let's jump in. From an economic perspective, we're going to talk a little bit about growth, inflation. We'll talk about employment and certainly talk a little bit about what's going on in central banks and bank policy, AI, and then we also have midterm elections coming up. It's kind of crazy how time is flying.

On the market side, we'll talk a little bit about this equity market and what's going on in corporate earnings and profitability. And we'll certainly hit on valuations. And we'll talk about fixed income. Rates, and long-term rates have been moving specifically higher, and we're going to kind of address all of that. So why don't we jump right in to give an economic update, Phil.

Phil: Yeah absolutely. So as we turn to the first slide, what are we seeing just from a gross domestic product perspective? So this is just US economic growth. What is impressive is first of all, nominal growth is very high—the blue line here. But the truth is, as you can see those bars at the bottom, is we do have quite a bit of inflation still. So real growth is running kind of in that 2% range. You step back and you say, this is an economy that's running pretty hot in that nominal GDP is pretty high. When we talk about corporate earnings think about revenues.

Companies do not receive revenue in inflation-trusted terms. They receive nominal dollars. So growth remains quite strong, especially in the nominal perspective. Once you adjust for inflation, it's good—not great—but in the 2% range. The truth is we're still chugging along. So let's talk about some of the components of growth.

So first, Brent, you hear us talk about all the time—the consumer. Roughly 70% of GDP is consumption. So on the left side, you can see much like with GDP, you can see that nominal spending is up a lot. But as we all know, anyone who goes to the grocery store or really anywhere, there's a lot of inflation, right?

Brent: For sure.

Phil: So in real dollars, that spending is good. It's positive, certainly not blowout. So what's keeping GDP estimates as high as they are or kind of good? Well, that's on the right side. So you can see since the war broke out in the Middle East and we saw gas prices go up, that gold bar—the contribution of household consumption spending—two forecasts of growth this year has come down a little bit.

And GDP growth has come down a little bit as well, not a ton, but a little bit, that dashed line. What is propping us up is private investment. And this is—

Brent: Pretty incredible.

Phil: This is artificial intelligence. This is data centers. That is what is keeping, even though it's not nearly as much as consumer spending. When you're talking about the amount of dollars we'll talk about in a moment, it is keeping estimates up. So the data center explosion build-out is contributing positively to GDP.

Brent: For sure. And as you just highlighted, one of the bigger factors affecting consumer spending and broader consumption is higher prices. And it's not just higher prices, it's the cumulative effect of the higher prices that we've seen over the last 6 years. And I love this slide because the title just jumps and tells you exactly what we're talking about here, which is saying the price for necessities has risen 2 to 4 times faster than normal since 2021.

And if I think about some of these household necessities—think electricity, gas, food, auto repairs, insurance costs—have grown at an exceptional rate and sort of that cumulative buildup, that almost price toxicity that is building up, that's really taking a big chunk of that nominal spending and really impacting consumers. And we're going to have to see whether or not this starts to abate as we go forward.

Phil: And when we're on the road, we hear this from consumers all the time that there's no way inflation is running 2.5% to 3%. And part of that is because you are seeing necessities. Insurance always jumps out at me.

Brent: It really does.

Phil: These things that, look, it hits every month or hits annually depending on how you pay it. It is just unbelievable how high it is—

Brent: Borderline egregious how high it's gone.

Phil: And that's why so many of these necessities have really moved higher.

Brent: Yeah, and another item hitting everybody is certainly the price of gasoline. And since the conflict started with Iran, obviously we all know that oil prices have gone up pretty precipitously. That's the dotted line here.

But what I think is interesting is that the refined product side—so think unleaded gas, diesel—went up significantly, but it hasn't abated nearly as much as the price of WTI crude. And again, crude is an input-to-refined output, things like gasoline here. And you can see whether it's unleaded gas or specifically diesel, which is a huge component in transportation built into the cost of food. You can see that we're back to almost conflict highs as it relates to the price of gasoline. And we're going to have to see this abate to really see inflation moderate lower, at least from a headline perspective.

Phil: And something I've heard you talk about a lot through the years is the refining mismatch in the US, where we can't necessarily refine that sweet crude we pump. Which is why, yes, we export crude but we also import crude.

Brent: That’s right.

Phil: When you have this bottleneck of refining, that is helping to keep refined product elevated even as the price of crude has come down.

Brent: Right. And when we think about one of the broader factors that's impacting monetary policy decision-making and why their job is so difficult and complex is when we switch from sort of the headline measures that we are talking about to core inflation. Here, we're looking at, in the gold line, we're looking at the Fed's preferred gauge, which is personal consumption expenditures or PCE, core PCE, and the blue line, which most people are familiar with, which is core CPI. You can see that over time, they've tracked each other relatively closely.

Recently, though, they've diverged significantly, right? So you have to ask yourself, is inflation accelerating or is it decelerating? And certainly there's some fundamental differences between PCE and core CPI. Core CPI certainly much heavier on a shelter-component perspective, where PCE is lighter on shelter but heavier on healthcare. But obviously, the job that the Fed has as it relates to direction is confusing.

Phil: Yeah, and look, no matter which measure you're using, let's just call core inflation 2.5% to 3-plus percent—the Fed's target is 2%.

Brent: Exactly. We're way above what their target is.

Phil: So no matter it's elevated. So let's talk about, as we flip ahead, the other side of the Fed's mandate. One side is price stability or inflation, as you mentioned, Brent. The other side is full employment. What is happening in this labor market? Well, we're kind of still in this low-hire, low-fire environment. You can see the number of jobs created on the left side in the last year is quite muted—positive but quite muted.

If you look at the monthly change in US employment, the 3-month moving average, it's near zero, right? And why is that? Well, some of it is because you cannot hire someone who is not there. So let's talk about that for a moment. This is a chart we haven't shown before. This is the yearly growth of the US labor force. We're now losing roughly 1 million workers per year. So remember, the labor force is employed plus unemployed and looking for work. So migration trends have, of course, changed when you think about the southern border. Think about baby boomers retiring. The truth is we are seeing fewer people in the labor force.

This is why, even though job gates have been minimal, the labor force coming down, this has kept the unemployment rate still quite low. We have not seen a big rise in things like initial jobless claims. So we're in this equilibrium in the labor market that, at least in my career, I have not seen for this long. We've been talking about this for an extended period. Usually we break one way or another, but so far it's certainly not a hot job market, but it also is not a job market that you'd say is recessionary.

Brent: Oh, for sure. And we showed a chart for a while about U3 unemployment going all the way back to the 1960s. And anytime you sort of hit that cycle low, you saw unemployment accelerate higher—either to the average or something worsening rapidly. It's not happening this time, which is sort of an interesting phenomenon.

And again, as long as consumers stay employed, that should keep consumer spending in check and kind of keep this economic train rolling. But it is quite a conundrum, to say the least.

Phil: In our business, it's dangerous to say this time is different, but at this point—we are in a unique place with this labor market. We would never say that this is a great labor market, but it also is not deteriorating as you would expect in, say, a recession.

So what does this all mean for the Fed when you put it all together? Well, one, you can see here as a reminder that the Fed has had two cutting cycles in recent years. In 2024 they cut the overnight rate—this is the federal funds rate we're showing here—in 2024 and 2025. Coming into this year, and actually the day before the conflict broke out in the Middle East, expectations were still for Fed rate cuts, right?

Brent: It's crazy.

Phil: Now they are for hikes. Yeah, and you can see now that there's an expectation for hikes. Chairman Warsh is speaking at Jackson Hole this Friday. We'll talk about more of that. We got questions in Q&A. We'll talk about that more in a moment. But if you look at futures, right now they're pricing the first hike is December of this year. That number has been moving around quite a bit.

You do have an election looming, though. And often, monetary authorities will wait until after to make decisions. But clearly, Chairman Warsh is very focused on inflation as a risk. And that has shifted expectations quite a bit from where we were, what, 6 months ago.

Brent: Oh yeah, and it's interesting for me. It's difficult because they're in such an interesting position because given the inputs to inflation, there's not a whole heck of a lot that monetary policy can really do to affect the current situation, right? Supply side-driven factors that are affecting things, specifically we talked about oil and whatnot and the conflict.

Phil: DRAM is something we've been talking about on recent webinars.

Brent: Yeah, not much prices can change given Fed policy. But I think what's really important is it's not just a US phenomenon. So what we're looking at here is market expectations around the world. And you can see that many areas—whether it's the Eurozone, UK, Canada, Australia, et cetera—have gone from one of sort of an easing bias to a more tightening bias here. And you've seen a pretty significant trajectory.

As one would expect, Japan is running their own race here. And, you know, they are sort of the outlier here. But by and large, many foreign central banks are finding themselves in the same position. And it makes sense because a lot of the impacts as it relates to commodity inputs or DRAM and technology are globally oriented. They're just not a US-specific phenomenon. But again at the end of the day, not only is the change in policy universal within Europe, you're also seeing that feed back into fixed income markets, which we'll cover in the section as it relates to what's happening.

Phil: Sort of a global tightening bias, you might say.

Brent: Exactly. And you highlighted in the opening as it relates to growth that private investment and the spending by hyperscalers on the AI build-out has just been absolutely phenomenal. I know that we've covered this slide in the past, but from an update perspective. From 2020 to 2025, $1.2 trillion spent, which is kind of incredible as it relates to this build-out. But what I find amazing is look at 2026. Beginning of this year, we are expecting $650 billion. We are now up to almost $800 billion, a 21% increase in expected spending this year alone on AI build-out. And then when you go further, from 2026 to 2032, $8 trillion in total expenditures.

Phil: This is certainly a topic that is on people's minds. It's going to be a topic in the upcoming election, the midterms. There is some NIMBY-ism, Not In My Backyard. So how much is put in place? I think there's an open debate around that.

But this is what companies have announced. And even if you say, hey, we put 80% of this in place, these are really profound numbers. To the point of that scale, this is something we've shown before, but we really want to hammer home is this is capital expenditures spending as a share of GDP of all sorts of historically important things—railroads, electrification, the Apollo mission, telecom of the 1990s.

Brent: Wow.

Phil: As a percentage of GDP, the only thing that's higher is railroads in the 1800s. And by the way, our economy was small in the 1800s. Think about us post-World War II compared to today. So as a percentage of GDP, railroads is the only one that's higher. But if you look at this as a multiple of spending versus the pre-boom of these various cycles, AI—and you can see is here—this is unique. This is a one of one based on our work.

Brent: Yeah, we've never had a ramp up this fast.

Phil: So if this feels historic for those who—I find myself thinking about the telecom boom of the 1990s a lot, right? For those who are thinking about prior booms, this is completely different scale and something that I think we're going to continue to talk about, but that markets and investors are going to be contending with for years to come.

Brent: Well, and I think what's really important, even when you relate to the previous slide, we have $1.2 trillion spent. And certainly by the time we get through this year, we probably will have spent that $800 billion. Again, expectations can change, right? So the rate of acceleration will have to depend on the success of this, the return on invested capital and whether or not these projects actually come through to fruition. So we do expect a good bit of variability, not only in the speed of this ramp up but the total dollars that will be spent.

Phil: Absolutely.

Brent: So Phil, I cannot believe, I mean, November is right around the corner, right? It's late August already. So midterm elections are coming up, and certainly pretty soon will be all abuzz about what's going on as it relates to the election broadly. Specifically as we break down the congressional race on the left-hand side and we think about it, overall, midterm elections are projected to be very, very tight.

No runaways, no significant stories here yet. But when we look on the left and we look at what's going on with the Senate broadly, you have about 35 of the 100 seats are up for reelection this year, which is a pretty big number. And when you can actually take a look at this, you can see there's roughly about nine seats that are very, very close.

And you can see that the Republicans only need to win three to maintain or keep that 50% edge. And the Democrats need to win about seven seats to get that majority at 51%. You can see at the bottom, right now it's effectively a coin flip, right? The probability is still sitting with the Republicans maintaining the Senate at about 53%.

But you and I know that these are just prediction markets. They are going to change quite rapidly as we actually approach midterm elections. And they're invariably incorrect, so we'll have to see what actually happens.

Where we think that there might be a little bit more noise is on the right-hand side in the House, right? So you have about 38 seats there that are really closely contended. And you can see right now at the bottom, the probability of the House flipping from Republican to Democrat is sitting at about 85%. Again, a lot can change. But it looks like if this were to hold, that we might have divided Congress post-midterm elections, which should interestingly change the landscape potentially as it relates to fiscal policy and things along those lines.

Phil: That's right, which historically divided government's not the worst thing for markets, but clearly we will be watching this closely as will investors in coming months.

Brent: So let's shift gears away from the economy, Phil, and let's talk about the markets. And let's kind of talk about where we've been over this long bull market that started back in October of 2022 and where we are now.

So if we look at the chart on the left, let's go all the way back to the lows that we saw on October 12th of 2022 to now, and you can see the dark blue line is the S&P 500's total cumulative price return since that low. And you can see the biggest driver of returns in this bull market, as we all know, has been the Magnificent Seven that you see there in gold.

And as you sort of run your eyes down and you look, the lowest grower was the equal-weighted S&P 500. So there was a lack of breadth, specifically in the beginning of the recovery, from the market lows in 2022.

Phil: And something that was really a focus in markets and the press was that this was such a narrow rally.

Brent: Exactly, exactly. And when you kind of run your eyes down, and whether you're looking at international markets in orange and small cap in the lighter blue, you can see that sort of distribution, it was a very top-heavy market. Now when you look at the chart on the right, which is this year, which—and some of this actually started back in 2025—but you can see that that story has completely flipped on its head. You can see that year-to-date, small cap and equal-weighted S&P 500 have been the leaders right there with international markets, right? So that chart is completely flipped around.

Phil: Magnificent Seven at the bottom.

Brent: Yeah, the Magnificent Seven, right? So the thing that's rewarding and good for me to see is that broadening out of the earnings story, of the revenue story, of the margin story, is affecting the other 493 of the S&P 500, which is good to see. Small caps are starting to participate. These beaten-down areas of the market are really starting to participate. And we believe that this isn't a short-term thing. We believe that this rotation is likely to continue potentially for the next handful of years.

Phil: It's really a healthy sign for markets. Let's say artificial intelligence, as we just spoke about it, this is a one of one historically. It's that important. It can not only benefit the companies building AI.

Brent: That's right.

Phil: It has to benefit other companies. And by the way, we're starting to see that earnings broadening as well. This is a good thing if you like markets to move higher.

Let's talk about those fundamentals for the market. One, estimates for 2026 just continue to climb—

Brent: It's incredible.

Phil: —in a remarkable way. You can see that during earnings season, do you see this leap up? Why is that? Because we've seen pretty remarkable beats during earnings season. If you're looking—and we'll talk about this more in a moment—but fundamentals have been a major driver of this market so far year to date. If you look at quarterly earnings growth on the left side here, 2026 second quarter. We just finished an earnings season. We do have one big company coming out actually as of this recording date later today.

But earnings growth of 30%, which is just unbelievable. Average is about 7.5%. If you include a couple one times—we don't really like to include—but a couple one times from the big tech companies, they're marking to market some of their AI investments. That number is more like 50%, which is really wild.

So you hear this concept of earnings bubble, et cetera. I'm not so sure there's such thing as earnings bubble. Earnings are earnings.

Brent: That's right.

Phil: And if this is money that's actually making it to the bottom line, this is incredible. And something, by the way, that's quite unique compared to, say, the late 1990s. And then you say, well what are the margins? This is all just a revenue story.

Brent: This is the slide that blows my mind.

Phil: Margins are incredible. And to that point of broadening—okay, the S&P 500 margins are higher than equal weight. Equal weight here is where all companies have the same contribution. Of course they're higher. The biggest companies are, as we like to say in the business, printing money.

But look at the equal weight. You're talking all-time-high margins in equal weight. This is not only a Magnificent Seven story or a hyperscalers story. When I look at that 15% margin—which, by the way, that equal-weight margin is a margin that many companies would be very happy to have.

Brent: And then portending forward equity market returns. Again, to highlight in the title—next 12 months operating margin, so this isn't trailing. This is the expectation of what's going to happen over the next 12 months.

Phil: And these numbers have been continually revised higher, as you can see here.

So what are we seeing in terms of breadth in this market, really, to hammer home that point you made earlier? Let's look just within the S&P 500, and we're looking at sectors with positive earnings growth. All 10 sectors, as you can see on the far right side, have positive earnings growth, right? Various amounts or amplitude of earnings growth. This is not coming out of a recession. This is very rare. Look at the boxed areas, historically. Coming out of the pandemic—all 10. Well, why is that? Because you had an earnings disaster and then all 10 were positive in the following year. Coming out of the Great Financial Crisis—same thing. These are where the base effect is very easy, easy comps or comparables, as we like to say.

Here that's not the case. We didn't have a recession last year. These are really quite remarkable. And when we talk about breadth, we've talked about it in so many different ways, but this is not one sector or two sectors. We are seeing earnings growth contributed by all. And I said 10 sectors. Back when I did equity strategy it was 10. It's now 11 because we have REITs. But when you see all sectors, all 11 positive, I'm showing my age here, Brent. So when you see all 11 positive, it is very unique not coming out of a recession.

Brent: And one of the topics that gets thrown around and hotly discussed is, well equity markets have been fantastic, earnings look great, but what about valuations? Valuations are near all-time highs. The market's expensive. We constantly hear all of that on the road. What we're looking at here is the forward PE ratio or the next 12 months PE ratio, which is nothing more than what investors are willing to pay for a dollar of earnings over the next 12 months. So it's a gauge that we look at quite often.

And what you can see is certainly, you know, the forward PE relative to the long-term history has risen. But what you think about and you look at this—and I like to look at this from the pandemic going forward—certainly we've had the multiple rise and fall. We obviously had a drawdown in 2022 where the multiple fell.

But by and large, if you drew a line through that data from 2020 to now, it's basically a straight line. And so while we've had variability, earnings have constantly risen up to keep that multiple in check. And again, earnings are really driving returns of equity markets. And while valuations, yes, are expensive in the US, earnings have stepped up to the plate to really drive it.

Phil: And you know, to put it simply, if you liked the market on December 31st of last year and the only thing you worry about is valuation, you should technically like the market more today. The market's cheaper today than it started the year. Now, valuation is not a good thing to invest on in the near term, but it just shows that if you're worried about the expensiveness of the market, it's cheaper today than when we started the year.

Speaking of which, why don't we dig into some of the contributors of total return.

Brent: Yeah, so when I break down the total return of the S&P 500 into three broad components, where I look at earnings growth, dividends and then sort of that PE ratio, that multiple expansion or contraction, you can see on that bar on the left since the beginning of this bull market run back in October of 2022.

Phil: The lows of 2022.

Brent: The lows of 2022, yeah, October 12th of 2022. You can see that, you know, more than 62% of the total S&P 500 return is fundamentally driven, right? A large percentage of that coming from earnings growth and dividends, and about 38% coming from that multiple expansion, much of which was coming out of that 2022 low, where you had a good bit of multiple expansion as earnings were starting to recover.

But as you just highlighted really nicely, the bar on the right is the current year. And of the almost 14% return, you can see that the multiple has contracted 5%. And I think about that in total percentage terms, right? You're talking about more than a quarter of the total returns was from that valuation contraction.

Phil: So basically if the multiple was flat this year, the market would be up more.

Brent: Yeah, almost 19%, right? So again, earnings have been and fundamentals have been the broad driver of equity market returns. And to your point, which I love what you said, is that the equity market on a relative valuation perspective has actually gotten a little bit cheaper and in absolute valuation has gotten cheaper.

Phil: So the setup for equity investors when you think about health of the market—of course we can always have drawdowns, et cetera—but the health of the market, we've had a year in which broadening has happened and a year in which earnings have also broadened and a year in which all of the gains—more than all of the gains, as you can see on the right side here—are from fundamentals, not from multiple. That is a healthy market for us.

What we tend to worry about, and if you go and listen to webinars in years past, is when the multiple is outpacing earnings growth because that means you're becoming more expensive.

Brent: Yeah, you're paying more for the same dollar of earnings.

Phil: But the truth is, a lot of that multiple expansion turned out to be right when you think about last year. And now earnings are catching up.

So let's talk about our price target. We have an S&P 500 next 12-month price target. We do not do year end because we have the freedom to say no, we're looking out 12 months.

Brent: That's right.

Phil: Doing a year-end price target sitting here in almost September, you're saying where's the market in 4 months? We don't really like that. So we are revising our numbers. As a reminder, the base case in our previous estimate was 8,000. We're moving that up to 8,300. So to let you behind the curtain a little bit, we use earnings forecast and we adjust those forecasts, and you end up looking not just the next 12 months but then months 13 to 24. And then you make a multiple estimate on that.

The earnings revisions have been so strong as we showed earlier, that that alone pushed our numbers up quite a lot, just because expectations have improved. In the base case here, we are taking earnings estimates and we're downwardly revising those over the next 12 months. And then we're assuming something like 11% earnings growth, which by the way would be well below where consensus is now, a little bit of multiple contraction. And that gets you to 8.5% gain of 8,300. To remind you, and we always say this when we revise our price target, we don't think the markets move in straight lines.

Brent: No, certainly not.

Phil: Obviously, there's good news priced in. We can bounce around. But that's on trend where we think we are in a year. Bear case down about 18%—6,300. Bull case up about 19%. So a little positive skew. That is not something we've seen. Why is that? Because the market is cheaper today than it was at the beginning of the year. To be clear, the bear and the bull are not the extreme examples. These are reasonable bear, reasonable bull. As we all know, those who went through the financial crisis or the pandemic or 2000, the real bear case, the extreme bear case, is always a lot more than 18%. We're saying in a more reasonable framework, this is where we stand.

Brent: Yeah, and I will say for all equity investors that should be long-term investors, this is merely just a data point for you to understand the path going forward. You should tune all of this out and focus on long-term investing in financial planning as we continue to see, you know, again, as you pointed out, markets don't go up in a straight line. So we will see some volatility. But by and large, we're constructive overall.

Phil: That's right. So what about the yield curve, Brent? There's been a lot of focus on rates particularly in recent weeks. What are you seeing?

Brent: Yeah, well, I mean, and as you highlighted really nicely, as we've moved from an environment where at the beginning of the year we expected multiple cuts, now we're expecting multiple hikes and the yield curve has moved appropriately.

So the gold line here is the yield curve as of today. And the dark blue line is where we started the year at. And that lighter blue line is as recent as the end of February. So this is how much things have moved in such a short period of time. And what I really want to do is from a comparative perspective, look at the light blue line, Phil, relative to the gold line because that's really showing you the true amplitude of the moves that we've seen as monetary policy has changed, as the fiscal situation has changed.

And you can see across the board we've had a move, which we call sort of a bear steepener, which we have this parallel move across the rate curve. So whether you're looking at the move from the light blue line to the gold line at the twos or tens or twenties or thirties, you see sort of this more parallel shift in yields, and yields have moved broadly higher, right?

So the good news is that while yields go up, prices do go down. The important thing is that for fixed income investors, higher current yields—what we call purchase yields—lead to higher expected returns on a going-forward basis. So while we have a significant move up in yields, to me I look at that and it presents opportunity.

We continue to believe—and we'll cover in just a second—that we think that there's still going to be a good bit of volatility within rates, and we've had this move up materially. I kind of look at it more as a positive thing than a negative thing.

And a topic that's been in the financial news media quite often is what's going on in the very long end of the Treasury yield curve and thinking about where the Treasury, 30-year Treasury bond, has moved. You can see here that the 30-year Treasury is back at its highest yield in a little bit more than 20 years.

And there's a lot of potential reasons for that. You know, we have specifically the fiscal situation passing $40 trillion in debt, interest expense on an annual basis, eclipsing 20% of tax revenues. You have AI financing with debt now, not just equity issuance. A lot of that AI financing has been on the longer end of the curve, which is crowding out capital there. As we highlighted quite specifically, inflation is also affecting oil, stubborn inflation not moderating lower, is all being reflected in the longer end of the curve. And we think that it's going to be this way for quite a while.

Phil: Yeah, it would feel if you look at recent years like there's kind of a floor under longer-term rates. If we showed the 10-year, same sort of thing, you just are not seeing a move lower. That term premium certainly is on the rise.

Brent: Yeah, and as we highlighted earlier with global foreign central banks and what they're doing on the policy side, you can see global government bond yields are higher across developed markets.

And specifically when we look at the bellwether 10 year across many nations, you can see it's not just the US. Whether it's Germany or the UK or Canada or Australia, you're seeing 10-year yields rise pretty significantly. So higher yields globally present good opportunity, not just for US investing but for international investing.

Phil: Real opportunity for investors. When we talk to business owners, one thing that all business owners are facing is a higher discount rate because the concept of "free money" that you saw in the pandemic era and really a march lower for decades is a thing of the past. We are now back to yields that are not all that high historically. You can see that here, are actually fairly normal.

It just means that for running a business, that hurdle rate is now higher. But for investors, there is an ability to take advantage of this. So let's talk about those longer-term rates a little bit more relative to monetary policy and mortgages as well. So here we're showing the federal funds rate. As a reminder as I said earlier, they cut in 2024, the Fed did, and then 2025.

What's interesting, though, is look at that 10-year line. It is higher than it was before the Fed started cutting. Why is that? Alan Greenspan, the late great, called this the Great Conundrum. The Fed controls the overnight rate. They do not control long-term rates, right? And we can talk about the Treasury buybacks in a moment as well.

This is a free market. This is a liquid market. And when you look at the 10-year, well, things like the 30-year mortgage are much more correlated with the 10-year Treasury, the 30-year Treasury, than they are with the federal funds rate. So you'll hear someone say, rightly, I would like the Fed to cut so my mortgage rate goes down.

Unfortunately, that's not how it works. And the truth is, mortgage rates are basically where they were when the Fed started cutting because that yield curve steepened, as you mentioned. This is a challenge but also an opportunity for investors.

Brent: For sure.

Phil: So let's talk about investing for the long term. Brent alluded to this when we talked about price target. We publish a price target because we're asked to, not because someone knows exactly where the market is going to be in 12 months. But it's a way to show you a framework. The truth is, for long-term investors, you have to have a financial plan. You have to understand what buckets you need. A cash bucket makes sense. Fixed income makes sense. Balance in portfolios, as you mentioned, makes sense. But for the equity, long-term stock portfolio, it really is about time in the markets, not timing markets.

So this is something that we recently updated, we've shown in the past as well. If you had $12,000 a year from 1980 through 2025 and you had to invest that $12,000 each year, how does that look under various investing frameworks?

So in the first example, perfect timing. You are omnipotent. Each year, you invest your $12,000 at the annual low. One year, that low might be in January, one year it might be in October. But every year, you call the bottom to the day—this is impossible, but you are the greatest investor in the history of the world.

Brent: Yeah, for 45-plus years.

Phil: For 45-plus years. Perfect timing portfolio, it's worth basically $20 million, which by the way, that's an incredible number. And it reminds you just how much the total return of the stock market accrues and compounds.

Okay, next example, worst timing. You are the worst investor in the world. This is also impossible, but somehow each year—and it feels this way, by the way—each year, you invest your $12,000 at the yearly high. One year that's in March, one year that's in December. And there's a big sell-off. You know, you called the top, as we say. You still capture 76% of that $19.6 million.

Brent: Incredible.

Phil: Now two more real-world examples. First day of the year. I know people that do this. Each day of the year, they have their—

Brent: People get a bonus or they just put money into their portfolio.

Phil: Exactly, you put your money in at $12,000, first day of the year, you capture 92% of that perfect-timing scenario.

Brent: That's an incredible number. I mean, I remember when we first did that we had to double-check that a couple times. It sounded like a high number.

Phil: Well, and if you remember that markets go up much more often annually than they go down, it starts to make some sense. Okay, monthly dollar-cost averaging. This is even more real world. Think about your 401(k), your excess income you invest each month. If you do that on a monthly dollar-cost average perspective, you capture 87% of perfect timing.

Brent: Yeah, smooths out the highs and lows.

Phil: Almost 90%. If you said, you know, I just cannot pull the trigger for 45 years and you just stayed in cash—which, by the way, there's a place for cash—but you stayed in cash instead of investing in equities, you capture 3% of that perfect-timing scenario. So it's just a reminder that it is about investing, trying not to time—and it is so hard. It's hard for you and me, especially when the market's near an all-time high. It can be hard to do it, but it really is those who just invest each year, don't overthink it, that win in the long run.

Brent: Yep.

Phil: So with that, let's wrap it up and go to Q&A, Amy.

Amy: Hey, just before we jump into questions, just a quick reminder that we do have several publications available throughout the month. And you can visit FirstCitizens.com/Wealth/Market-Outlook to find all of those resources.

Well, thank you guys for taking a deep dive into markets in the economy. Brent, it's so good to have you back. I feel like we got the band back together here.

Phil, let's jump right in. So markets have been working 9 to 5 to figure out exactly what Chair Warsh is going to say at Jackson Hole. What are your expectations?

Phil: First off, I caught that. Rest in peace, Dolly.

Amy: I'm heartbroken.

Phil: So end of this week on Friday, Chairman Walsh is speaking at the Jackson Hole conference. All eyes will be on that speech. They are every year when the Fed Chair speaks there, but I think Chairman Warsh has really showed that he's going to keep his cards close to the vest.

From a forward guidance, especially near-term, what's the Fed going to do at the September meeting, for example, I would be quite surprised if there's a strong signal there. That doesn't mean there can't be market-moving statements come out of what he says. The Fed has instituted a multiple task force. I wouldn't be surprised to hear an update there.

And that can certainly impact the market's view of how the Fed is viewing things like inflation and full employment. Communication is a big topic here. But pretty clearly, I think Chairman Warsh thinks that less is more. And by the way, I'm not so sure I disagree with that. I think the financial press might because more is always more.

Brent: They love their film bytes, right?

Phil: But as someone who kind of came up career-wise in the Greenspan era, I think sometimes being able to surprise the markets is not necessarily negative. So something interesting will come out of that talk. I'm not sure guidance or what exactly the FOMC is going to do from a policy perspective is going to.

One other thing I should mention is the Fed's balance sheet. That is something that as a tool, we spend a lot of time talking about the fed funds rate, as we're showing here. But the balance sheet matters a lot as well. And there's a task force relative to the balance sheet. So maybe something comes out there as well. But I would not expect too much in terms of explicit disclosure.

Brent: Yeah, you would think your first time around that you would want to make sure that you focus on keeping it balanced and pretty level for sure.

Amy: And Brent, another thing coming out of the Treasury Department around rates is the buyback policy. Since that's something that doesn't happen every day, can you talk a little bit about what that is and what it means for markets?

Brent: Yeah, the Treasury normally does buyback programs across the entire yield curve as part of their ability to maintain liquidity and stability within the Treasury market. And the Treasury Secretary announced that they're going to increase their buybacks on the long end of the curve, again, to permit—to promote, rather—liquidity, stability, et cetera. The markets didn't really see it that way.

The initial move was a positive one. But as they digested the news, it was a little bit of a blink first and seen more as like, what don't we know? And I think it was one of those moves that we're going to have to wait and see what the ultimate impact was.

Rates have already risen back up to where they've been—that 20-year high that we talked about in the 30-year Treasury. So again, I think it's going to be very interesting to see what Treasury does relative to what you just talked about with President Warsh and what happens with monetary policy because they seem a little bit at odds at this point.

Phil: I think something we talked about with equity markets, and it holds for fixed income markets as well, markets are going to return to the fundamentals. So yes, the Treasury can interact in the market and maybe attempt to drive yields lower. But as we saw with quantitative easing years ago QE1 and QE2, the Fed was buying Treasuries. Rates went up not down, which is opposite of what you would expect.

The truth is these are free markets, and the markets are going to move to things like fiscal policy, deficits, inflation expectations, growth. There's so much happening outside of just the Treasury interacting in the Treasury market.

Brent: Yeah, and the market participants and the bond vigilantes will control the bond market broadly. And again, no matter what the government tries to do, free markets will continue to be free markets.

Amy: And speaking of free markets, tariffs have come back into the headlines. Phil, what are your thoughts there?

Phil: Yeah, I think that we all have a little bit of tariff fatigue after last year. And certainly there's fresh headlines with Canada and our neighbors over the most recent week.

Look, tariffs drive a couple of things. One, they drive uncertainty in the marketplace but also business uncertainty and eventually find their way into inflation, right? We saw even last year in which tariffs came well down from the initial levels. In the line items, you do see the impact of tariffs on prices. So we like the free flow of capital, is our bias. But of course you want trade to be fair as well. So there's two sides to that coin.

But just in terms of a trade war, that term is used intentionally, that causes disruption. So one of our biggest trade partners in Canada—conflict there, it definitely drives uncertainty for business owners and honestly for monetary authorities and prices.

Brent: And look, as we approach midterm elections, there's going to be a lot of sabre rattling, a lot of noise that are done for the reasons that they're done.

And I think cooler heads will ultimately prevail. Whether we're talking about trade with Canada like you mentioned or trade with Mexico or any of our global trading partners, we're going to have to find some type of thoughtful footing here to be able to see our economy continue to do what it's doing.

Phil: And that's what we saw eventually after Liberation Day tariffs last year was that, yes, there's a lot of sabre rattling, the level settled at still-high tariffs from a historical perspective. But these things end up in courts as well, which we saw last year. So to say that we know the outcome, we don't. But it is something that we all have to watch, particularly those who are dealing directly with these trade partners.

Amy: Well, those are great reminders. Thank you both for answering questions. And thank you all for listening. We hope you found this information helpful. And thank you, as always, for trusting us to bring you this information. We'll see you again next month.

Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Head of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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