Monthly Macro: Resilient Equities, Rising Yields, and a Shifting Playbook

00:21, Chris T

All right. Hey everybody. Today is Friday, May 29th, 2026. Welcome back to another episode of Monthly Macro.

It's been another busy and somewhat confusing stretch for the markets. You’ve got the war with Iran which is still ongoing. Inflation and rates are back in focus. And then, at the same time, equity markets have continued to show resilience. With our Growth Stock Conference, it'll be William Blair's 46th annual Growth Stock Conference kicking off next week, a lot of these same questions around macro, rates, the consumer, and market leadership are coming up more frequently in our conversations with investors.

So, joining me to discuss, as always, is William Blair macro analyst Richard de Chazal. Richard, good to have you back.

01:02, Richard D

Great to be back, Chris.

01:04, Chris T

Let's start with the war. It's still ongoing, doesn't feel like anything's broken yet, but, you know, despite all the warnings and whatnot, we've been hearing around energy and supply disruptions.

But then, at the same time, equity markets seem to be largely looking through it. Is it fair to say, you know, the market is treating this as a bit of a nothing burger? Why or why not?

01:25, Richard D

Well, good question. It does feel a bit like the market is, kind of, brushing this off and maybe not taking it as seriously as certainly the risks from when you listen to all of, pretty much all of the commodity experts, you know, are really painting a grim scenario. And the market seems to be, kind of, brushing that off.

I don't think that's entirely the case. You know, we just had an extended ceasefire, so I guess that's helpful. You know, it does feel like the appetite for the war is certainly waning on both sides. It seems like the Iranians can probably stick it out a bit longer, but maybe from the U.S. side, they really want to, you know, clear this thing up, you know, soon, even though it’s still not entirely clear what's been achieved there.

But, I think, for the market, what, you know, it wants to see, perhaps, before you, you know, you have a more adverse impact is actual demand risk destruction. And, you know, at least so far in the U.S. and even in Europe, really, we haven't seen that much of that.

You know, we've definitely seen higher gas prices, some higher grocery prices, but outside of that, not a lot. You know, we had this great jet fuel shortage scare where a lot of these companies were saying, you know, we only have a couple more weeks of jet fuel and then we're going to have to seriously cut back on all flights. And that's actually been called off.

You know, all of these companies from now found alternative supplies. But, you know, I think the hope is that the war will be over. And the Strait’s going to be open before we have other problems. You know, the food, fertilizer scare is another one that, you know, could certainly become a reality if things don't improve.

But, I mean, that's in Europe. That's in U.S. I think, across the rest of the world, Southeast Asia, India, Australia, we definitely are seeing some demand destruction. So, it's not quite as, maybe, insulated as we've been experiencing on our side. China, I think, has managed this pretty well. Remember, they've built up inventories over the last three years of coal and other commodities. So, that's helped a lot to take the pressure off.

And, I think, generally, you know, we're still, I don't know what, kind of, how you would say it, but we're, sort of, still in this phase where there are energy supplies through inventories that are being run down. Countries, I think, like the U.S. have increased their production. You know, there's been sanctioned oil that is being effectively unsanctioned. So, that's been helpful.

And then we've had all these other pipelines, you know, across Saudi and, I think, UAE. So, those have been pretty big wins, as well. But, I guess the fear is that, you know, these inventories are now going to be run down, probably in the third quarter somewhere. You know, people are talking about as soon as July, maybe August, maybe September.

And that's when the, sort of, commodity analysts, sort of, more negative scenario could actually start to kick in more. So, the longer this goes on, the more, you know, the worse it gets. And, you know, remember that if your supply gets cut, you basically have two choices. You either outbid your neighbor for what energy or commodities are available, or you cut back on demand.

So, I think, but to get back to your, sort of, original question, I think on the stock market, I don't think it's been ignoring it that much. I think the attitude has been that, you know, we'll probably get a deal done before breaking point.

And, I think, you know, you can't forget too that we've just almost finished earnings season. And earnings growth has been pretty phenomenal, I think, in part because of the war, actually. So, remember that earnings growth are nominal dollars, right? So, price increases impact revenues. And energy companies, too, have actually, you know, obviously are in upside now that the U.S. is a net energy exporter.

And, obviously, we're still in the midst of this AI boom. So, the market has a pretty big tailwind pushing it along there, as well. So, you know, I guess, and then maybe one other thing I think is that if you look at dispersion in the stock market, so the spread of returns, you know, across, say, the S&P 500, it's actually been extremely high.

So, this has really been a stock pickers market. It's not everybody's a winner here. This hasn't been, kind of, a broad-brush market. So, I think my point is that, you know, not the entire market hasn't performed well. It has been, sort of, a smaller group of companies. So, I think the bottom line I'd say is, I think the narrative that the market is totally ignoring that is probably not true.

I think the impact, again, has been relatively muted. We've had inventories. We've had, you know, a drawdown on those and some workaround solutions. We have the AI thing going on. So, actually, I think, you know, I think the market has been fairly rational so far and maybe not as irrational as others have been talking about.

07:11, Chris T

So, let's compare that to what we're seeing in rates. You know, the bond market feels like it's telling a slightly different story lately with yields moving higher. What's driving that? And is the bond market taking inflation and geopolitical risk more seriously than equities right now?

07:28, Richard D

Yeah, it definitely feels like that. It feels, like you, know bonds have performed, kind of, poorly. Yields have been rising. Like, these have been the adults in the room that, you know, the rational ones in the market.

And it's, I think, it's easier to pinpoint the bond market’s reaction because it's looking at this and saying, right okay. There's an inflationary impact. Now, we see the Fed is turning much more hawkish. So, for up to of the last few weeks, the Fed has been, sort of, saying, well we're just going to look through this. And now you're getting maybe not a majority, but you're getting more, sort of, forward guidance, if you will, around, changing from easing bias to a neutral bias and then some actually talking about rate hikes. Bond traders are looking around the world and, sort of, seeing yields rising everywhere there.

And, I think, the market is probably starting to look at this and say, okay, so what happens after this thing is over? I mean, you're going to have a lot more government spending on the back of this. Seems like you're going to need more, kind of, stockpiles or inventories of reserves, commodities, energy, you know, from a geostrategic purpose.

So, those are going to have to be built up. And then on top of that, we still have, you know, an aging population. We're going to have increased defense spending, maybe some AI dislocation. So, you're seeing increased, kind of, government spending coming out of that and, you know, more geopolitical risk. And I think the bond market starting to worry about that.

So, I don't think yields are necessarily going to come back down to where they were exactly before the war. I think this is just layered on top. You know, another scenario for why bond yields are going to be a little bit higher. So, you know, I think the bond market doesn't benefit from upside growth.

So, I actually think, you know when we were talking about equities, we could have mentioned that, too. But, there is upside economic growth as an actual risk here. So, right, remember at the start of the year people were talking about three rate cuts? And, you know, the labor market was super weak. And actually, it’s turning out to be, you know, much more resilient than people expected. Employment growth is, very tentatively, maybe, starting to re-accelerate.

So, that's not great for bonds either, but it's not so bad for equities. So, maybe, from that perspective, you know, the bond and the equity markets aren't quite as dislocated, or disparate, or sending a divergent message as it might seem to be on the surface.

10:30, Chris T

Let's talk about the U.S. consumer a little bit. You know, with gas prices pushing higher, I think a lot of people expected we'd see cracks by now. What's the current state of the consumer and how sustainable does that resilience look from here?

10:44, Richard D

Yeah. So, I mean, I wrote something on this recently. You know, it was, kind of, a “death of the U.S. consumer has been greatly exaggerated,” sort of, note. You know, I don't think the situation is great for the consumer. I think, maybe, from the, sort of, economic technical term for the consumer, the situation is meh. It's okay.

You know, there are definitely pockets of weakness. You know, lower income consumers are definitely suffering in the face of higher inflation. They're definitely not benefiting from any kind of wealth effect from rising asset prices. But, as Paul Krugman, you know, likes to say, economics is not a morality play. And if you look at the consumer in aggregate, you know, balance sheets are in good shape, debt ratios are pretty low.

And, I think, what would be surprising to a lot of people is, if you actually look at, so we just got some personal income data, and the savings rate came right down. So, that was a bit of a surprise for the market. But, if you actually look at liquid assets on consumer's balance sheets, so holdings of cash and money market mutual funds as a share of their total financial assets, they're actually really high, right?

So, I think the narrative out there is that the consumer is all in on this stock market with no savings. And I think that's not really the case. And I think what they don't have is a ton of real estate, so that share of their balance sheet has actually come down. And, so, I think, you know, that would suggest that they do have, I guess, more of a near-term buffer than people are thinking.

And I think the other thing is that remember, the labor market is now structurally tight, right? So, that wasn't the case in previous economic cycles, where at the first sign of an economic slowdown, the companies would just, sort of. fire a bunch of workers. They knew they could rehire them back afterwards.

This time around, you know, that's not the case. We have some labor hoarding going on, you know, and it seems to be more the weakness that we've seen so far has been more on the supply side than the demand side.

Like, we have this great demographic shift going on with lower birth rates, the aging out of the baby boomers. We have, you know, less immigration. We could have, for the first time since 1917, negative population change in the U.S.

That was the first time since the Spanish flu in 1917. I mean, that's nuts. These are the kind of things that have big, you know, macro structural impacts on spending in the economy. So, I guess my point is that, you know, I think the consumer is not great, but fine. And I think the other thing is that this is just not a consumer driven economic expansion.

We're in the midst of a of a CapEx business expansion, right? And that's something, maybe, we're not used to because we haven't seen a CapEx expansion in a while. And it's the consumer that's, you know, funding this expansion. So, that's not bad. It's just something we have to get our head around, that this is just, you know, the consumer is okay. It's just not a consumer cycle.

14:21, Chris T

You have also written recently that this could be a good time to start looking at quality stocks again. That's a shift from what we've talked about, I guess, in the last couple of years. Well, I should say that that's a shift from what's worked over the last couple of years.

So, why now and how should investors be thinking about that, especially heading into next week's Growth Stock Conference?

14:40, Richard D

You're right. I mean, I think, definitely, if we talked to our analysts and, you know, investors in quality growth, you know, it's definitely been a hard slog for a while now. This has been, really, a momentum driven market. I don't think the fundamentals have been terrible, but the market has been very clearly focused on, you know, one trade and that's the AI trade.

I think, well, how would we define quality? First of all, let's just say, you know, it's roughly companies with low debt. They have high and recurring growth rates. They have, you know, consistent returns on equity invested capital, good management. They also tend to be longer duration. So, they have, lower betas and longer duration, actually. So, the, sort of, kind of, textbook companies that you're going to want to own. And, I think, the view is that markets, you know, in textbooks, I guess, the view is that that markets are always these rational entities and all investors should be these, sort of, mini Warren Buffett’s, you know, searching out the best companies.

And, realistically, you probably have to think, you know, who in their right mind is knowingly going to be buying junk anyway? So, but I think that's actually wrong.

You know, there's certainly times where it definitely pays to slide down the quality scale and invest in lower quality names. And I think in a semi efficient market, quality can't always outperform, right?

Otherwise, you know, you'd get, you know, no performance.  That performance gap, that valuation gap would be priced out, right? And, I think that's not the case. There is a small and persistent valuation gap. But, also, though that these things tend to move in cycles, and, you know, as I say, there's clearly good times and bad times to be in quality stocks.

And, I think, as you point out, over the last few years, that hasn't been a great time for these. But, I think, now, you know, looking at some of these pretty good companies, it feels like they're literally on sale now. And, I think historically, on a risk adjusted basis, they do tend to outperform.

But, again, it's been a difficult last couple of years. But I think what you're seeing is investors are, kind of, bedazzled by AI, and there's nothing wrong with that. I think, you know, we are truly in a groundbreaking period of innovation. And there's definitely legitimate reasons to be in those trades.

But it does feel like if you look at these measures of dispersion or correlation in the market, that the concentration in the market is getting very high. And, in the process, a lot of good companies are just being ignored. And I think that's showing up in valuations.

So, if you look at, you know, relative PE ratios or price to free cash flow etc., you know, these things are quite attractively priced.

And I think, you know, Chris, I hear from a lot of clients that in the past has been, “that's an amazing company. But you know, it's always just too expensive.” And, I think, where we are now is they're actually not that expensive. But, of course, that's when no one wants them, which is why they're priced that way.

So, I think valuations are attractive because investors are just not interested, at the moment. And I think the second thing is that, again, we've talked about this before, is bonds are no longer positively correlated. Or, they are positively correlated, no longer negatively correlated with stocks. And I think that means, again, that bonds are not giving you that portfolio protection.

So again, I think, something like quality stocks should help to add some ballast to two portfolios, when they're seemingly very highly concentrated in one area of the market.

And I think, again, the inflation regime has changed. And I think the interest rate regime will reflect that, as well. So, we're no longer in this lower for longer interest rate world. It's now a higher for longer.

And if these companies have lower debt and stronger growth rates and can actually do very well in a slightly higher inflation regime and a slightly higher, interest rate regime, and you're being compensated for buying them with low valuations, I think, that tends to be attractive, as well.

And then, you know, they also tend to outperform if you look back historically, during economic downturns. And, I don't think we're on the cusp of one at the moment. But, you know, we are getting later into the economic cycle. And that's when, you know, typically you do start to see more of a rotation into these kind of names.

So, I think my view is that now is probably a good time to start layering into these names that the market is avoiding that no one's particularly interested in.

And yeah, we've got a Growth Stock Conference coming up next week. You know that's as you say, the 46th annual one, so that's 1980. I think it should be pretty fun.

We have, I think I counted 275 companies presenting, just about all of those are at the CEO or CFO level. And, I think, you know, I was looking at, attendee numbers, so the number of people that that signed up, but I definitely think that investors are starting to get a little more interested in looking at the, kind of, quality growth story. So, hopefully there's a lot of choice for them, you know, over the next week to look at there.

21:11, Chris T

Absolutely. Really helpful. Richard, thanks as always for the time. Thanks, everybody for listening. And we'll see you next month on Monthly Macro.