Friends,

The last time the U.S. government paid over 5.0% to borrow money for 10 years was 2001. I know -- how boring could this week's newsletter possibly get, right?

But this is an incredibly important number. It represents the risk-free rate.

Imagine you're a retiree in 2020. You are terrified of stocks, but at the time, a 10-year Treasury yields only 0.6%. The government would only pay you $60 per year for every $10,000 in bonds you buy.

That's so low that it nudges you to invest in stocks.

But that was six years ago; today, you can get a 5.2% return on your investment over ten years. A $10,000 bond bought will now yield you $520 per year -- way more than before.

That's high enough for you to keep your money out of stocks and in the bond market.

In essence, this is why rising rates are bad for stocks: they raise the bar for how high your returns need to be in order for investing in stocks to be worth it.

Why isn't the market falling?

But here's the thing. Those same rates have risen sharply since the start of the conflict in Iran. Yet the S&P 500 keeps marching higher.

How is this possible?

As we like to say, investing ultimately comes down to a very simple equation:

The 10-year Treasury rate affects valuation, and valuation sits inside of the "Story" part of the equation.

"Reality" represents actual earnings that have been created in the real world by companies that we use every day. And while the "story" part of the equation might be falling right now, the "reality" part has never been stronger, according to FactSet.

Consider this:

• Over the past fifty years, earnings for S&P 500 companies have grown an average of 6.5% to 7.0% per year.
• In the first half of this year, those figures were much higher: 29% and 52%, sequentially.

Some of those big numbers reflect how we count things (like investments) differently. But that doesn't explain all of it. A simple fact remains: S&P 500 companies have never been more profitable than right now, and it's expected to keep going for a while.

Does that mean that you should invest blindly in this market? Not at all. One thing that earnings can hide, for instance, is that cash flows have been shrinking as data center buildouts continue. If those investments don't pan out, it could be painful.

The bigger point, however, is that you need a balanced "Yes-And" view in today's market. Yes, higher rates are scary. Yes, the market has been on a good run. And, thus far, the economic numbers back up that momentum.

Wishing you investing success,

Brian Feroldi, Brian Stoffel, & Brian Withers Long-Term Mindset

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