Dear Valued Clients and Friends –
A classic, not-to-be-missed “around the horn” Monday Dividend Cafe awaits.
Dividend Cafe on Friday looked at the famous Disney/Fox deal of 2019 and wondered out loud what it has to teach us as investors. The lessons we extract may surprise you! The written version is here (my favorite), the video is here, and the podcast is here.
Off we go …
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Market Action
- Markets opened down this morning and zigged within a 100-point range throughout the day.
- The Dow closed up +95 points (+0.19%) with the S&P 500 up +0.19% and the Nasdaq +0.10%
*CNBC, DJIA, May 11, 2026
- I believe the market, as a broad (cap-weighted) index, is overpriced and frothy, and I believe the various metrics in the chart below objectively say what they say. I also will add, though, that valuation is not (and never has been) a timing indicator, and that this year (thus far), multiple expansion has TAKEN from market performance, where earnings growth is over 100% of market return.
- Looking at those items above, the “S&P dividend yield” reflects a “very expensive” valuation … Well, the Friday closing price of the S&P 500 and the trailing-12 actual cash dividend of the index equals a … 1.08% dividend yield. This is the lowest yield in the history of the S&P 500. We can’t quite call the index a cash-less investment, yet, but it is as close to such as it ever has been (though, of course, one can always sell shares in the great companies of the index to get cash, if the reason you invested was to sell off the shares you own). But as valuation metrics go, this one may be more important to me than any of the others.
- There is no question that the market is desensitized to Iran right now. It does not appear that many of the things we were told were driving markets higher out of that matter have materialized, yet markets have shrugged almost all of that off. Crude still sits in the high 90’s, but markets have shrugged that off. There is no question that, outside of traders trying to front-run headlines (or headline), trying to throw off frontrunners, there will be some real economic impact from all of this, and that has to be absorbed eventually. I can’t tell you when the market will care about the Strait of Hormuz again. I can tell you that if it stays closed, it will.
- “But how are markets rallying like this with such high valuations and with such uncertainty in the Middle East?” The answer is: Earnings have trumped those two things. For now.
- The ten-year bond yield closed today at 4.41%, up 4.8 basis points on the day
- Top-performing sector for the day: Energy (+2.63%)
- Bottom-performing sector for the day: Communication Services (-2.33%)
- Earnings are growing like crazy for the S&P 500, right? In fact, earnings are up +27% year-over-year, right? So why worry about AI and froth concerns if earnings are that hot? “Other income” was 34% of net income this quarter!!! Ummmm. What? It is usually between 1% and 10% of total income. What explains this massive increase in “other income,” which was a massive part of the increase in total earnings? Well, the valuation of the companies on the balance sheets of the hyper-scalers; that’s what explains it. Anthropic, and Open AI, and other private holdings being marked up drove “other income” up. So don’t worry about AI froth because earnings are great, unless the great earnings are, well, “connected” to AI froth? h/t Peter Boockvar
Top News Stories
- My understanding is that President Trump and President Xi are set to meet this Thursday, though it could be Friday or Saturday. While various things related to AI and tariffs are surely on the agenda, the major question going into the summit will be what, if anything, China will do about the U.S.-Iran conflict.
- I suppose this directly ties into my bullet point above about the market’s current desensitization about Iran, but today it really seems as if the cease-fire is getting closer to termination, and the outlook for current talks essentially fell apart.
Public Policy
- Is there a new reconciliation bill in the cards that could provide further tax relief? I remain skeptical that such is politically doable any time soon, but there certainly are some smart political operators trying to drive such a thing through. What are the components that could, possibly, end up in such a bill? The only tax cut I could see making it is indexing capital gains to inflation (and if not doing so across the board, at least for primary residences). While plenty of other policy ideas are being floated for a reconciliation bill, none that I am seeing would actually qualify under the budgetary rules.
- The Virginia Supreme Court ruled Friday that the redistricting plan in Virginia (which was likely to give the Democrats 3-4 new House seats) was not proper procedurally, putting the districting back to the current setup. That said, even in the current model, two or three seats currently held by Republicans are very tight.
- The SEC has put out for comment a proposed rule change that would move quarterly reporting requirements for public companies to semi-annual intervals. I have grown in optimism that this might actually happen.
Economic Front
- The April jobs number came in at 115,000, better than expected but still underwhelming. But with downward revisions in past months only 16,000 (I feared it would be worse), the total picture was pretty good, certainly compared to what it could have been. The general bias is modestly optimistic, and I am very glad not to see an acceleration of firing and to actually see a modest increase in hiring. I don’t like the labor force declining by 92,000, but that is a longer-term story.
- Manufacturing jobs continued to decline, as protective tariffs do not seem to be doing anything to add manufacturing jobs in the United States.
- Consumer Confidence fell further to 48.2 in April. People ask me a lot how the economy can be doing so well when people say they have no confidence in spending. I say, “People say a lot of things; look at what they do, not what they say.” The version of that in my world is, “Don’t tell me what you believe; show me what is in your portfolio.”
- I am a little perplexed by how often it is happening with no one pointing out the obvious, but the administration has decided to respond to higher beef prices by … lowering the tariffs on beef. Yep. Hmmmmm. What else could we do with this logic?
Housing & Mortgage
- I mentioned the possibility of an additional reconciliation bill in the Public Policy section above. Something that has been mentioned is the idea of codifying “portable mortgages” into federal law (that is, the federal government mandating that a bank be required to take on the prior “below market” mortgage rate on another property. I simply cannot imagine how this could be done in the United States since:
- There is no legal justification for federal price intervention.
- Mortgages are so deeply connected to mortgage-backed securities that such a mandate would throw the entire model into disarray, and
- The bulk of the political and social pressure exists on behalf of first-time homebuyers who would not benefit from such a mandate.
- Existing home sales in April were up +0.2% on the month and totally flat year-over-year. Within the data, a couple key data points that are important to note: Days on market for sale events are up +10% year-over-year; transactions happening for first-time buyers are down -3%, while transactions happening for investors are up +6.7%. What does it all mean? We have a frozen residential market for single-family homes that can only thaw when prices come down.
Federal Reserve
- The vote to approve Kevin Warsh as the new Fed chair should be any day now and would take effect going into the weekend, with Jerome Powell’s term as chairman ending this Friday.
Oil and Energy
- WTI Crude closed at $98.45, up +3.2% on the day
- I have maintained steady commentary throughout the military operation in Iran about the “backwardation” of the oil curve – the consistent pricing of oil that was highest in short-term windows, and much lower as one went out the time curve. In fact, the January 2027 contract had stayed around $70/barrel even as WTI had stayed between $95 and $110 for much of the last month. That said, the January contract now is trading around $77, so all at once we can see that: (a) The oil market remains quite backwardated, and yet (b) The idea of returning to $65-70 oil any time soon has been increasingly priced out, regardless of how short-term expectations have changed
- The S&P 500 was up +2.3% last week, and oil prices were down -7%, which brought both upstream and midstream energy stocks down. At some point, this hyper-tight short-term correlation where the S&P goes in the inverse direction of oil, which goes in the same direction as midstream/upstream, will dissipate, but right now that correlation is purely trading-driven.
- But connecting my last two bullet points together: A higher terminal rate for oil prices (further out the curve) is far more incentivizing for production than the short-term price that markets have been obsessed with since early March. Should the 9-12 month price stay well into the 70’s, that is far more bullish for the energy sector than a 30-day price in the 90’s.
- The export LNG space is seeing huge increases in forward guidance for 2026. I got to talk to the founder of the leading export LNG terminal company, Cheniere Energy, on my Capital Record podcast last week. The talk had nothing to do with stock prices or forecasts, but rather the history of this fascinating company, and of course, the energy opportunity that exists in the U.S.
Ask TBG
| “What can we expect if both the House and Senate go Democrat majority into 2027?” ~ Bernard B. |
| It is actually a fascinating question because I have been in the camp that there was a 99-100% chance that the Democrats would take a House majority, and I had the Senate odds somewhere around 75% that Republicans would hold their majorities. The way various redistricting efforts have gone (court rulings, etc.), the Kalshi prediction market odds actually took the Democrats’ House majority odds all the way down to 74%, yet the Senate odds for the Democrats have improved. I think the basic assumptions in all of this are that a blue wave, to some degree, is coming, but all the redistricting efforts from both parties in the House will end up, net net, marginally favoring the Republicans. My base case remains a Democrat House majority (but with less of a margin than previously assumed) and a Republican Senate majority. Both are a little less assured than I would have previously argued. That all said, the question is “what happens if …” Essentially, the Democrats would have investigation powers, control of committee leadership, ability to block or approve judges and cabinet appointees, and control of the legislative agenda. What they would not have with any of this is the ability to pass a law (since it would require the President’s signature). This is what we call dividend government, and it has been the norm for most of the last forty years. |
On Deck
- Clients will receive their Weekly Portfolio Holding Report in their inbox on Wednesday morning, per usual.
- Friday’s Dividend Cafe will offer some sober truths about the U.S. national debt.
- The Trump/Xi summit in China later this week
Knicks fans, do not celebrate early. There is a lot of basketball left to play. We’ve seen too much this year in the news warning us of the dangers of celebrating early.
Have a wonderful Monday night and reach out with any questions.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
