Prior to this weekend, oil prices were rising for the better part of two weeks, and bond yields had been doing the same for about two months. But stock investors appeared to mostly shrug both off. Their main argument was that as long as the economy is healthy, earnings will stay strong and stocks have nothing to worry about even if the Federal Reserve is going to be raising interest rates. That was the case until last week, anyway, when Brent crude topped USD 100 per barrel for the first time since May.
Steve Sosnick, chief strategist at Interactive Brokers, compared the stock market’s reactions to the (squirm-inducing) analogy of a frog in hot water on its way to being boiled—only this time, he says, the frog started to feel the heat. “We might be finding ourselves in a situation where events in specific shares have forced inwardly focused investors to take more notice of rising global tensions,” he wrote. “Like the proverbial frog in a pot on a stove, gradual changes can go unnoticed for some time.” In this case, rather than getting singed, the frog—that is, stock investors—seems to have finally noticed the danger. Of the USD 30 rise in oil, “stocks [earlier] shrugged off the first USD 24 or so without much concern. [Starting Thursday] it has become much more concerning.”
In this week’s markets brief, we look at another key trend in the markets: rising bond yields in connection to this week’s Federal Reserve meeting. Plus, we check in on what Morningstar analysts will be watching for on some key Big Tech earnings reports, and look at surprising numbers on Vanguard investors’ cash and bond holdings.
Why the Rise in Bond Yields May Be Driven By More Than Oil Prices
Last week, the yield on the US Treasury 10-year note—a critical interest rate in the US economy—reached its highest level since January 2025. In fact, the 10-year yield has only been higher in one other episode since the 2008 financial crisis.
The rise in oil prices is the clear culprit for the latest move. But John Briggs, head of US rates strategy at Natixis, points to a complicating factor that may be adding to the rise in yields: the new Fed policy and communication regime under Chair Kevin Warsh. “The difficult part here is that we don’t know the Fed’s new reaction function yet,” he says. “Do higher oil prices outweigh lower CPI? Does the latest move in oil push some [Fed officials] to want to hike, or do they want to wait, as they did before?”
Before Kevin Warsh joined the Fed as chair, Jerome Powell’s Fed had communicated a widely understood preference to wait-and-see how much higher energy costs could pass through to the broader economy. Only after waiting would the former Fed decide to raise rates. (Powell remains at the central bank as a Fed governor.) So far, the inflationary impact of the oil price surge earlier this year appears to have been limited. “But with Warsh, we don’t know what he will focus on. And if we don’t know the answer, it contributes to a market that is averse to owning bonds with higher oil prices,” Briggs says.
It’s unclear how much clarity will come Wednesday afternoon, when Warsh gives his post-meeting press conference. Although bond traders have raised their expectations for a rate hike on Wednesday, the central bank is generally seen as likely to hold off until its September meeting. But Warsh has made it clear he won’t be providing guidance on what the Fed could be doing at future meetings, or even much color on this week’s debate.
After a Bumpy Start to Earnings, More Big Tech Reports on Deck
Earnings season is in full swing, and so far, investors have been giving the thumbs-down to the market’s biggest names. Alphabet GOOG fell 7% Thursday following its second-quarter results, and Tesla TSLA dropped nearly 15% (all returns in US dollar terms).
The common denominator for both appears to have been investor concerns about continued increases in capex with an uncertain payoff. Morningstar analysts downplayed those worries. “We believe investors should focus on the AI demand story, which supports such large capital expenditures,” equity analyst Malik Ahmed Kahn wrote of Alphabet’s results. On Tesla, analyst Seth Goldstein wrote, “Tesla is investing heavily today to become a leader in autonomous vehicles and humanoid robots in the future. While the market is reacting to the near-term negative free cash flow, we see strong long-term growth from these new product developments.”
Looking ahead, we’ve got four more of the Magnificent Seven reporting this week. (It will be another month before Nvidia NVDA reports.) Here are some highlights from our earnings previews:
Meta Platforms META
“Looking for any additional commentary on Meta Compute (the firm’s initiative to sell excess AI computing capacity to third parties). We think investors will be asking questions and waiting for official commentary on whether Meta will formally transition to a neo-cloud business, which would help quell some concerns about AI return on investment.”
Microsoft MSFT
“Microsoft is making a big bet on capital expenditures for artificial intelligence, which have grown faster than revenue. This raises concerns about how much the company can recoup on massive investments. We will also see if an increase in Claude Copilot seats (software licensing) can help drive AI adoption higher.”
Amazon AMZN
“We will see whether Amazon is on track to meet its $200 billion capital expenditure outlook for 2026. We will also look for guidance, though Amazon only guides one quarter at a time, so there will be less to pick apart. Guidance for the second quarter was better than expected when provided on the first quarter call, but because Prime Day fell in the second quarter this year, any commentary on that would be interesting.”
Apple AAPL
“Profitability will be the key metric for investors this quarter. In light of skyrocketing memory prices, Apple elected to raise prices midyear 2026 in an unprecedented move. We’ll be looking for the impact to margin from memory cost headwinds, and any forward commentary on the impact management expects from price increases.”
Among Vanguard Investors, Cash Is Popular
Pop quiz: How much cash does the typical Vanguard investor hold in their IRA and taxable accounts? How much in bonds? One statistic that may not be too surprising is the average weighting of stocks: 65%. But the cash/bond breakdown may be a surprise.
Aggregating data across 7 million retail accounts, Vanguard recently provided a profile of what the typical investor was holding at the end of December. The firm stripped out target-date funds and balanced funds and looked at the remainder of the holdings in self-directed accounts. In the end, the snapshot covered more than USD 82 billion of individual investor allocations.
The answers: 10% in bonds and 24% in cash. Even among higher-balance investors, cash levels are high, in the 10%-20% range. And for investors under 45 years old, the average bond holding is less than 4%, but cash rises to 26%-34% depending on the age cohort.
Matt Wrzesniewsky, Vanguard’s head of fixed income client portfolio management, counts himself among those surprised by the high level of cash, and he sees a paradox in the data. On the one hand, “investors in the equity markets are taking considerably more risk than they have historically taken.” At the same time, he says, investors with discretionary accounts often buy the dip on market declines.
But the relationship with bonds seems different, according to Wrzesniewsky. It was only just a few years ago, in 2021 and 2022, that the bond market had back-to-back losses. On top of that, “Some of the younger investors grew up in a period of time when interest rates were at zero,” he notes. “There was no real yield.” The attitude has been “Why are you buying fixed income?” Wrzesniewsky says the landscape has changed. With the runup in yields, “there’s great value in bonds and probably some attention going there now.”
