Know The Now – Policy Dissonance

AI-driven productivity is supporting a broadening equity rally, but rising public-debt costs and currency pressures are pushing policymakers toward implicit control of long-term yields.

• U.S. leading indicators, unemployment, temporary payrolls, services activity and manufacturing surveys are improving, while small-business capital-expenditure and hiring plans are rising and business uncertainty is easing.
• The recovery is sharply K-shaped: labor-force participation is at its lowest ex-Covid level in five decades, wage growth is slowing relative to prices, but household net worth has climbed to roughly eight times disposable income as asset owners benefit from equities and real estate.
• S&P 500 earnings are growing at about 30% annually versus 2–3% GDP growth; IT margins and private nonresidential investment are rising, while hyperscaler capital expenditure is expected to exceed $800 billion in 2026, supporting the case for an AI-led productivity cycle.
• Market breadth is improving, with 71% of equities above their 200-day moving average; high-yield spreads are near cycle lows at 268 basis points, financials offer an 84% payout ratio and 5% cash yield, and Brent crude is a risk as it approaches $100.
• Japan faces a currency and debt dilemma: debt service absorbs roughly 25% of the budget, energy imports represent 90% of consumption, and the country holds $1.19 trillion of U.S. Treasuries; meanwhile, U.S. net interest payments have nearly doubled to about 20% of Treasury receipts in four years and Treasury buybacks run at $6 billion per month.

Takeaway: The authors remain constructive on equities because earnings, margins, AI investment and market breadth are improving, but investors should account for oil, inflation, yen weakness and politically constrained fiscal policy that may lead to de facto yield-curve and currency control.