BayTrust Financial, Author at BayTrust Financial

Dec 09

Mitch Zacks – Weekly Market Commentary: How AI Spending is Lifting U.S. Economic Growth, and What That Means for Investors

By BayTrust Financial Weekly Market Commentary

There is little question about the impact the artificial intelligence boom is having on S&P 500 earnings and total return.¹ According to my colleagues at Zacks Investment Research, the “Magnificent 7” group of mega-cap technology stocks is on track to bring in 26% of all S&P 500 earnings this year, up from 23.2% of the total in 2024 and 11.7% in 2019. The group also made up roughly 35% of the index as of the end of the third quarter.²

But what about the impact the AI spending boom is having on the U.S. economy?

In short, it’s been significant.

By some estimates, first-half 2025 GDP growth was substantially powered by spending on data centers, information-processing equipment, and software. Excluding these categories, economic growth would have been more modest. To grasp the scale of AI’s impact, consider that the dollar value of AI data-center investment has exceeded total consumer-spending contributions to GDP in 2025. The chart below also demonstrates data centers’ contribution to total fixed private investment. It’s pretty remarkable.

Wall Street Journal³

Without the lift from AI capex, economic growth may have been more modest, closer to 1.5% perhaps, in the first half. Growth is growth, but I think it’s a fair argument to frame the broader economy’s performance as more ‘steady’ than ‘booming.’ The impact of AI spending doesn’t dilute growth elsewhere, it just moves the needle in the booming direction.

Outside of the AI theme, investors can find soft patches in the economy. Retail sales in September (delayed due to the shutdown) rose just 0.2%, with noticeable pullbacks in tariff-sensitive categories such as vehicles, electronics, and clothing.⁴ Spending on services remained firm, however, which suggests consumers are still spending selectively and with more emphasis on value. It’s a pattern consistent with an expansion that continues, but with less broad-based momentum.

Sentiment surveys show similar nuance. The Conference Board’s confidence index fell in November to 88.7 from 95.5, while the share of households reporting plentiful job opportunities also stepped down. The University of Michigan’s survey has hovered near historical lows for months. As I wrote in a recent column, I think this is symptomatic of a “K-shaped” economy, which is relying more on high-income consumers and wealth effects than on job creation or broad wage gains. This is not a negative setup, it’s just a read on where the economy largely is today.

Does this all mean that a slowdown in AI spending would cause an economic downturn by itself? At this moment, I don’t think so. But I think it could meaningfully trim the growth rate, such that the U.S. economy would be posting more modest growth than the 2% to 3% headline rate that signals overall strength. This possibility does not suggest crouching in defensive mode and waiting for AI spending to pullback substantially—it argues for positioning in solid companies with earnings growth momentum outside of the AI trade.

Bottom Line for Investors

I think it’s clear that AI spending has provided a boost to headline GDP this year. When you strip out the sizable capex numbers, what you see is a modestly positive expansion versus a boom. I want to be clear—this is not a bad backdrop for long-term investors. But it does leave the cycle more sensitive to a potential shift from a single, powerful growth engine (AI capex).

I think that’s the real takeaway here. The economy is in fine shape, but it’s more dependent on one theme than usual. If AI investment keeps flowing, the expansion can keep chugging along. If it downshifts, the underlying modest growth pace may become more visible. Rather than trying to forecast when or if that happens, investors are better served maintaining balance across sectors, styles, and regions so portfolios aren’t tethered to any one story. If AI capex deflates, I could see assets rotating into under-valued areas of the market that are still seeing strong earnings growth.

¹Wall Street Journal. November 24, 2025. https://advisor.zacksim.com/e/376582/ng-4b6bc7ff-mod-article-inline/5twbjh/1402707083/h/Xd24NqpfuxBTxb20ypIcpZPxo_W4o4kOOMs0GnDkLxY

²Zacks.com. November 22, 2025. https://advisor.zacksim.com/e/376582/outlook-improves-a-closer-look/5twbjl/1402707083/h/Xd24NqpfuxBTxb20ypIcpZPxo_W4o4kOOMs0GnDkLxY

³Wall Street Journal. November 21, 2025. https://advisor.zacksim.com/e/376582/ng-4b6bc7ff-mod-article-inline/5twbjh/1402707083/h/Xd24NqpfuxBTxb20ypIcpZPxo_W4o4kOOMs0GnDkLxY

⁴Wall Street Journal. November 25, 2025. https://advisor.zacksim.com/e/376582/ons-536756d2-mod-hp-lead-pos11/5twbjp/1402707083/h/Xd24NqpfuxBTxb20ypIcpZPxo_W4o4kOOMs0GnDkLxY

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Dec 02

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Mitch Zacks – Weekly Market Commentary: The “K-Shaped” U.S. Consumer Landscape

By BayTrust Financial Weekly Market Commentary

In looking closely at the U.S. consumer, I see 2025 shaping up to resemble the “K-shaped” pattern we saw earlier in the decade. The “K” refers to higher-income households continuing to spend comfortably, while lower- and middle-income consumers show more strain and even pull back from certain categories of purchases.

This divergence matters for investors, but not because it signals an imminent recession. Instead, it helps explain the mix of economic data we’re seeing at a time when broad sentiment continues to sink.¹

Recent shutdown-delayed data showed retail sales slowing toward the end of the third quarter, rising just 0.2% in September. Categories tied closely to tariffs, such as vehicles, electronics, and clothing, all showed noticeable pullbacks. But there were also bright spots, with service-oriented spending, particularly in restaurants and personal care, remaining firm. This data reinforces the argument that we’re in a “K-shaped” consumer environment, where different income groups are spending in different directions.

On the sentiment side, the Conference Board’s confidence reading dropped sharply in November to 88.7 from 95.5, and the University of Michigan’s survey fell to 51 (see chart below). That’s one of the lowest readings for consumer sentiment on record. In that same survey, 44% of middle-income households said their financial situation was worse than a year ago, compared with just 23% who said it had improved. U.S. households have been weary of higher prices for years, but we might be starting to see a wider group ‘throwing in the towel’, especially those who expected prices to reverse under the new administration.

Lower- and middle-income households have been the most affected by higher living costs, depleted savings, and a cooling labor market. The ADP reported that private employers shed an average of 13,500 jobs per week in the four weeks ending November 8. That sort of softening understandably weighs on sentiment.

But the other side of the “K-shaped” ledger shows higher-income households continuing to show much more resilience. Spending in discretionary service categories rose 0.7% in September, and wealth effects remain meaningful. Household net worth has surged in recent quarters, rising at nearly a 15% annualized rate, which has acted as an important counterweight to softer job creation. Even with frustrations about inflation, this level of wealth growth historically supports consumer spending for some time.

The divide is showing up clearly in behavior.

Many households at the lower and middle end of the income spectrum are trading down, hunting for value, and cutting discretionary purchases. Some surveys show the middle class reporting near-decade lows in financial comfort, despite relatively stable employment. Meanwhile, the upper-tier consumer, who accounts for a disproportionately large share of overall U.S. consumption, has continued to spend. On balance, it’s been enough to keep the broader economy moving forward.

This brings up an important acknowledgment investors should make, and also be watching closely: consumer sentiment has become sensitive to market swings. The S&P 500’s roughly 5% pullback from late October highs coincided with a noticeable dip in upper-income sentiment surveys. But when markets strengthen, confidence tends to rise as well.

Taken together, these dynamics matter for investors because they help explain why consumer data can appear mixed without signaling recession. A softening labor market, persistent inflation pressures, and fading confidence among lower earners are all legitimate concerns. But as long as employment continues to grow modestly, wealth effects remain supportive, and higher-income households continue to spend, the overall expansion can persist, even if it feels uneven on the ground.

Bottom Line for Investors

A “K-shaped” U.S. consumer environment is not synonymous with a weakening economy. Many consumers are feeling pressure, but it’s also true that we’re still seeing upward movement in real wages (see chart below). I take this to mean that consumers broadly are feeling frustrated, but they’re not retrenching.

That said, the expansion is increasingly reliant on those with the healthiest balance sheets. Higher-income households continue to spend because equity gains, rising home values, and strong net-worth growth give them the capacity to do so. This helps offset softness elsewhere and has been a stabilizing force.

But it also highlights a key vulnerability. When spending becomes concentrated at the top, the economy becomes more sensitive to anything that chips away at wealth effects. A deeper equity-market pullback, a cooling in housing, or an AI-related shift in white-collar labor demand could have an outsized impact on the very group carrying overall consumption.

For now, the expansion appears durable, supported by ongoing job creation, real wage gains, and strong household balance sheets at the upper end. But the reliance on those dynamics is exactly why investors should stay attuned to them. Because if they begin to turn, the broader economy may feel it more quickly than usual.

Sources:

¹Wall Street Journal. November 24, 2025. https://advisor.zacksim.com/e/376582/36756d2-mod-economy-lead-story/5tvhp8/1393518193/h/KJKzQMvgS0fGlD3cEpUGfIfgGE8OQ-b9JSI00gZJdU8

²University of Michigan. 2025.

³Fred Economic Data. July 22, 2025. https://advisor.zacksim.com/e/376582/series-LES1252881600Q/5tvhpc/1393518193/h/KJKzQMvgS0fGlD3cEpUGfIfgGE8OQ-b9JSI00gZJdU8

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Nov 18

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Mitch Zacks – Weekly Market Commentary: Investors Should Expect More Volatility in the Tech Sector

By BayTrust Financial Weekly Market Commentary

In early November, some of the biggest names in technology experienced sharp volatility, with the Nasdaq posting its steepest weekly drop since April. The correction was short-lived, and the warning headlines faded the following week.

But in my view, investors should not simply move on. There’s a lesson from the volatility that I think will help investors navigate the months and quarters ahead.

The lesson is this: when one sector dominates returns for as long and as strongly as technology has, investors should expect turbulence, even if the earnings and free cash flow remain positive.

I’m referring, of course, to the AI-related trade. The biggest names in technology have been the market’s clear leaders this year, but the rally has also produced the kind of concentrated leadership that tends to invite corrections. In many cases, the issue is not that the companies’ business models will eventually collapse. It’s that valuations eventually stretch faster than earnings can keep up. When enthusiasm clusters in a single theme, price moves can disconnect from fundamentals, and short-term volatility becomes inevitable.

In early November, some key industry executives made comments about intensifying competition and soaring capital costs, which may have incited some profit-taking after an extraordinary run. It leaves the door open for even the slightest disappointment to trigger an outsized drawdown.

We’ve seen this pattern before.

The late 1990s’ “Nifty Fifty,” the post-financial-crisis tech boom, and the pandemic-era rally all followed a similar script: rapid outperformance, stretched valuations, then a period of cooling or rotation. Importantly, those pauses did not signal the end of innovation or waning long-term opportunities. In my view, they simply reflected the markets’ way of redistributing excess. Corrections often unfold not through broad crashes, but through leadership shifts from one sector to another. This is how I’m increasingly viewing Tech dominance today.¹

So, rather than viewing recent weakness as a warning to flee stocks, investors might see it as a reminder of why diversification is the real opportunity, and the hedge at hand. Concentration risk can quietly build up in bull markets, especially when a single narrative (AI) captures both headlines and capital flows. A diversified portfolio, spanning multiple sectors, market caps, and geographies, helps cushion against those inevitable air pockets.

History shows that investors who stayed balanced through tech-driven selloffs fared far better over time than those who chased performance or tried to time their exits.

I would also argue that it is worth acknowledging that parts of today’s AI boom carry a whiff of excess. The technology itself is transformative, but the financial structures supporting it are becoming increasingly creative, and in my view, potentially risky. Building out data centers, chips, and infrastructure powering AI requires extraordinary amounts of capital, and Wall Street has responded with equally extraordinary financing.

I’m going to mention specific companies below, but I want to be clear to readers that I do not make specific security recommendations in columns. My mention of companies here is only to highlight the aforementioned financing structures that I believe investors should be watching.

All the deals involve data centers. Meta’s Hyperion project in Louisiana and OpenAI’s Stargate data centers in Texas and Wisconsin both blend elements of private equity, project finance, and long-dated corporate debt. Some arrangements even promise equity-like returns on what are effectively fixed-income risks, with the companies selling equity in a data center and guaranteeing a payout if they want to exit a lease. This sort of financial ‘innovation’ evokes memories of past cycles when easy money and optimism blurred investors’ perception of risk.

I am not forecasting that the AI bubble is about to burst. But I do want investors to remember how much future growth is already being priced in and how leveraged some of those expectations have become. Even within tech, capital intensity is rising, competition is intensifying, and returns on incremental investment are likely to normalize. Markets will adjust accordingly, and those adjustments can feel abrupt after long periods of one-way momentum.

Bottom Line for Investors

Given what I’ve argued above, last week’s volatility should probably be viewed as healthy. It reminded investors that market leadership never lasts forever and that portfolio balance is the best safeguard against hype cycles. Diversification does not eliminate risk, but it does reduce the impact of any one theme’s unwinding, whether it’s AI today or some new innovation tomorrow.

¹Wall Street Journal. November 11, 2025. https://advisor.zacksim.com/e/376582/reet-896e0023-mod-hp-lead-pos1/5tt438/1380628309/h/kUo8x2x4lsl3zazuK6cQyXnggPjz2KiA42GT1XWYTIs

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Nov 13

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Mitch Zacks – Weekly Market Commentary: The Perils of Taking Private Markets Public

By BayTrust Financial Weekly Market Commentary

For decades, private markets were an investment category for large institutions like universities, endowments, and pension funds. The common thread connecting these institutions: deep pockets, very long time horizons, and the ability to trade liquidity for the possibility of higher returns.

Those days may be changing.

A new policy shift could soon make private market investments available to millions of everyday Americans through their 401(k)s. The idea is simple and marketable: private markets promise diversification, the potential for higher returns, and supposedly smoother performance than public stocks and bonds.¹

But investors would do well to approach this new frontier with caution. The evidence suggests the benefits of private-market investing are overstated, while the risks aren’t fully understood and/or appreciated.

Start with the idea that private assets are less volatile. Data can make it appear that way, but it’s largely a matter of accounting. Because private holdings aren’t traded on open exchanges, their prices don’t update in real time. The result is what is known as “volatility laundering,” whereby risk looks more measured on paper than in practice. A recent analysis from Morningstar found that private assets can, in fact, be more speculative and leveraged than their public counterparts, with “stability” often reflecting a lack of transparency, not lower risk.

Performance is another area where the marketing outpaces the math.

The most common measure of private equity success, the internal rate of return (IRR), is not comparable to the annualized returns investors see on mutual funds, ETFs, or statements for separately managed accounts. IRRs can look impressive because they measure money flows rather than time, and early distributions can artificially inflate results. A 15% IRR does not mean the investor actually earned a 15% compounded annual return.

When researchers use better apples-to-apples performance comparisons, such as the private market equivalent (PME), which asks whether investors would have done better in a public index fund, the results become more clear-eyed. Median private equity returns have historically matched, not beaten, the public market once an investor accounts for fees, leverage, and liquidity. The averages tend to be pulled up by a small number of big winners, but most funds fall short.

What I’m describing above about private funds is not well known, and it may result in a rush to bring these strategies and products to the retail market, with many investors eager to participate. Asset managers are launching “semi-liquid” funds that blend private and public holdings, with limited redemption windows and higher fees. But if markets sour and redemptions surge, liquidity strains could ripple across the system.

For retirement savers, this investment trend raises a fundamental question: why complicate what’s already working? In my view, everyday investors do not necessarily need exposure to opaque, expensive funds to build wealth. Broadly diversified portfolios of stocks and bonds have delivered competitive long-term returns with full liquidity and far lower costs over time.

I’m not saying private investments have no place in a portfolio. For investors with the means, the patience, and the ability to evaluate managers closely, private funds can add diversification and potentially enhance returns. But for most 401(k) savers, the rush to “democratize” private equity looks more like a marketing push than a breakthrough in access. ‘Democratizing’ an asset class doesn’t necessarily democratize its best opportunities, which will likely remain reserved for the largest institutions.

Bottom Line for Investors

The growing push to open private markets to retail investors may sound like progress, but it’s worth remembering what makes retirement investing work in the first place: transparency, liquidity, and discipline. Public markets already give investors the ability to own a slice of long-term, global economic growth at a minimal cost. Adding complex, illiquid, and high-fee products to that mix could make retirement portfolios harder to manage, not necessarily better diversified.

The irony, in my view, is that the more these private funds are adapted to meet retail needs, by trading more frequently or disclosing more information, the more they start to behave like public markets. That reduces the so-called “illiquidity premium,” which is the very feature designed to produce higher returns in the first place.

¹ Wall Street Journal. October 27, 2025. https://advisor.zacksim.com/e/376582/edit-winter-is-coming-cb016ec5/5tscfk/1373516278/h/R__iaeT5-tqrMLFa71Y4O_Lo9ER76L4IBY4ZAila6zs

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Nov 11

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Mitch Zacks – Weekly Market Commentary: Dollar Doom? Markets are Telling a Different Story

By BayTrust Financial Weekly Market Commentary

Headlines have been buzzing over the last several weeks as gold and other “hard” assets have sprinted higher. The rally has been accompanied by a familiar storyline: investors are supposedly fleeing dollar assets, termed the “debasement trade,” because of the U.S.’s unsustainable fiscal trajectory, deficit spending, upended global trade, etc.¹

In the most extreme of cases, the narrative is that the dollar is doomed, which means investors need to look beyond dollar-denominated assets for secure investment opportunities.

Don’t “buy” it.

If the dollar were genuinely under siege and U.S. financial assets were being shunned, we would see telltale signs in various corners of the market. But we’re not.

Start with bonds. When investors fear a long-run loss of purchasing power, they usually demand higher yields to compensate. Instead, the opposite has unfolded: the 10-year Treasury yield is notably lower than where it began the year, and even the 30-year, typically most sensitive to long-term inflation worries, has drifted down as seen in the chart below. That isn’t the behavior of a market dumping Treasurys. On the contrary, it points to steady demand.

10- and 30-Year U.S. Treasury Bond Yields

Source: Federal Reserve Bank of St. Louis²

Another place to look is inflation expectations. The 10-year breakeven rate sits a bit above 2.2%, and 30-year expected inflation is near that level as well. In other words, expectations are pretty firmly anchored, with bond markets still expecting inflation to average close to the Fed’s target over the long haul. If investors truly believed a lasting bout of currency erosion was at hand, you would expect those measures to pop, dramatically. They haven’t.

10- and 30-Year Expected Inflation

Source: Federal Reserve Bank of St. Louis³

The dollar tells a similar story. After a weak first quarter, the broad trade-weighted dollar index has been broadly stable for months and has even outperformed several major peers recently. If fears of dollar erosion were truly driving flows, you would likely see a cocktail of rising long-term nominal yields, widening corporate credit spreads, and a sliding greenback. We’re just not seeing that now.

To be sure, I’m not making an argument against gold or other inflation hedges here. A modest allocation can diversify portfolios and dampen volatility, particularly during bouts of geopolitical stress or when real yields fall. The keyword is “modest.” Going all-in on a single narrative leaves investors exposed to timing and headline risk. If markets have taught anything in the last few years, it’s that stories can travel faster than fundamentals, and then reverse just as quickly.

Long-time readers of my columns know what I see as the most effective inflation hedge over time: owning stocks. Buying shares of leading businesses offers a natural inflation valve, since companies can lift prices, improve efficiency, and compound earnings over time. Across most rolling 10-year periods, U.S. stocks have outpaced inflation—even through episodes of rising deficits, shifting policy regimes, and currency fluctuations. Over longer investment horizons, which most investors have, profits and dividends have been powerful antidotes to inflation and currency fluctuations. I don’t see that changing now.

Bottom Line for Investors

The so-called “debasement trade” may have a kernel of logic behind it, but not the kind of logic that justifies labeling the dollar as doomed. When you strip away the noise, what markets are signaling is stability, not debasement. Bonds are rallying, inflation expectations are anchored, and the dollar remains the world’s preferred reserve currency. I’m confident that will not change in our lifetime.

For investors, that means this is not the time to overhaul portfolios in favor of hard assets or chase a narrative about dollar decline. The playbook hasn’t changed: own the world’s most productive companies, stay diversified across asset classes, and let corporate earnings compound over time. A small allocation to gold or other real assets can provide ballast, but the real protection against inflation or dollar weakness is the same as it’s always been, in my view: Own stocks.

¹Reuters. October 20, 2025. https://advisor.zacksim.com/e/376582/g-debasement-trade-2025-10-20-/5trbgk/1365057499/h/MRKBoufWwlpb8oEKjzYxtZbaBfL9mNRWT8wrtpBlPAc

²Fred Economic Data. October 28, 2025. https://advisor.zacksim.com/e/376582/series-DGS10/5trbgn/1365057499/h/MRKBoufWwlpb8oEKjzYxtZbaBfL9mNRWT8wrtpBlPAc

³Fred Economic Data. October 28, 2025. https://advisor.zacksim.com/e/376582/series-T10YIE/5trbgr/1365057499/h/MRKBoufWwlpb8oEKjzYxtZbaBfL9mNRWT8wrtpBlPAc

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Oct 27

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Mitch Zacks – Weekly Market Commentary: Do Recent Bankruptcies Signal Systemic Credit Market Problems?

By BayTrust Financial Weekly Market Commentary

The high-profile collapses of First Brands Group (a global auto-parts supplier) and Tricolor Holdings (a subprime auto lender) have stirred some alarm amongst investors. The central question investors are asking is: are these isolated failures, or early warnings of deeper credit stress?¹

I think the answer lies somewhere in the middle.

First Brands’ bankruptcy is a striking story. The company, once an industrial roll-up boasting 26,000 employees and a portfolio spanning 25 well-known automotive brands, borrowed over $10 billion from a mix of Wall Street lenders and private funds. But as new directors and forensic accountants now sift through its books, they’ve uncovered what appears to be $2 billion in unaccounted-for funds and billions more in off–balance sheet borrowing.²

From my vantage, it appears that exposure to First Brands’ bad loans is spread across dozens of banks and collateralized loan obligation (CLO) funds, which is actually a good thing. It means no one institution’s holdings are likely large enough to trigger contagion. Even still, it’s a sharp reminder of the lack of transparency that has crept into parts of the private debt market, now approaching $2 trillion in size. It is relatively common to see these types of credit quality issues creep up near the end of an easy money environment. Increased risk aversion for debt investors who have been searching for yield would be appropriate in response to the First Brands’ bankruptcy.

Then there’s Tricolor Holdings, a Texas-based subprime auto lender that targeted borrowers without credit histories or documentation. It filed for liquidation last month, listing more than $1 billion in liabilities. The business model, based on “buy here, pay here” auto sales financed through asset-backed securities, crumbled under rising delinquencies and tighter funding conditions. Now, some tranches of Tricolor’s securitized debt that once traded above par are only worth pennies on the dollar.

Taken together, these bankruptcies show how weaker players at the fringes of the credit spectrum are struggling. Years of easy liquidity and investor demand for yield have encouraged aggressive underwriting. As the economy normalizes and interest rates settle above the near-zero era, some of those bets are now being tested.

The private credit market, in particular, is where I’m increasingly turning my focus. Defaults in business development companies (BDCs) and other private-lending vehicles have been creeping higher. Roughly 11% of loans in these portfolios now pay interest “in kind”, that is, with IOUs instead of cash—signaling stress among smaller borrowers. Fitch’s measure of private credit defaults hit 9.5% this summer before easing slightly.

This is a market and a trend worth monitoring very closely. As I write, however, I think it’s important to qualify that “higher defaults” does not mean “credit crisis.” Public credit markets, the most transparent barometer of corporate financial health, aren’t showing much strain. High-yield bond defaults remain near 1%, well below their long-term average of around 4%. And investment-grade and high-yield spreads, as seen in the chart below, remain historically tight. Investors aren’t demanding higher risk premiums, which suggests the market is still confident that these issues are more local than systemic.

The takeaway for investors, in my view, is to acknowledge that credit markets are running hot. The additional yield investors receive for holding corporate debt versus Treasurys has fallen to near 25-year lows, prompting companies to issue debt at record levels. This strength underscores confidence in the market, but it could also signal investor complacency. It’s important to constantly try to differentiate between the two.

Bottom Line for Investors

If I could sum this story up in a single sentence, it would be this: Remember that easy money often sows the seeds of future problems.

Or put in an even simpler way: bad loans are often made in good times.

The failures of First Brands and Tricolor are cautionary tales, and I think they warrant greater investor attention. They remind us that in the far reaches of the private and subprime credit universe, excesses built up during the era of cheap money are still unwinding. Investors should watch these developments closely, but also be careful not to overreact. Evidence from broader credit markets, like tight spreads, low defaults, and contained fallout, does not point to systemic stress, at least not yet.

¹ Wall Street. https://advisor.zacksim.com/e/376582/es-306d7869-mod-article-inline/5tql5g/1355093773/h/YN-hUysQ1y4uie04NzdszYAQt7KthqrMofBorT0yCqY

² Wall Street. https://advisor.zacksim.com/e/376582/mod-Searchresults-pos-4-page-1/5tql5k/1355093773/h/YN-hUysQ1y4uie04NzdszYAQt7KthqrMofBorT0yCqY

³Fred. https://advisor.zacksim.com/e/376582/series-BAMLC0A0CM-/5tql5n/1355093773/h/YN-hUysQ1y4uie04NzdszYAQt7KthqrMofBorT0yCqY

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Oct 13

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Mitch Zacks – Weekly Market Commentary: Why Markets Rarely Flinch at Government Shutdowns

By BayTrust Financial Weekly Market Commentary

Why Markets Rarely Flinch at Government Shutdowns

As readers are well aware, the U.S. government officially shut down after lawmakers failed to reach a funding deal. To date, paychecks for hundreds of thousands of federal employees have been paused, and some national parks and agencies have been shuttered, including the Bureau of Labor Statistics, which supplies jobs and inflation data.

Government shutdowns almost always get constant media attention, perhaps understandably so. They are disruptive and create plenty of short-term uncertainty.¹

But for investors, they need not be a source of stress or urgent concern. History tells us, quite clearly, that shutdowns have not been a source of meaningful and certainly not lasting economic impact.

Since 1976, there have been more than 20 shutdowns of varying lengths. None has caused a recession. None has triggered a bear market. And in many cases, stocks moved higher during the shutdown and in the months immediately after. The longest shutdown on record, 35 days spanning late 2018 into early 2019, coincided with a strong equity rally.

If we parse out the data even more, going back to all shutdowns since 1976, we find that the S&P 500 was up an average of 12.1% in the year following a shutdown. In the second longest shutdown (21 days in late 1995 and early 1996), stocks went up 3.1% in the month after the shutdown, and +21.3% in the following year.

This is not to say shutdowns come without consequences and should be completely ignored. Hundreds of thousands of federal employees are furloughed without pay, while others, such as members of the military and air traffic controllers, continue working but receive their paychecks later. Businesses that depend on government contracts can see delays, and data collection also halts—which means key economic reports, including the monthly jobs and inflation data, are delayed. In an environment where the Federal Reserve is highly data-dependent, that could momentarily complicate monetary policy decisions.

Still, the broader economic footprint of a shutdown is surprisingly small. Most of the federal budget keeps flowing even when Washington hits a stalemate. Social Security, Medicare, and interest payments on U.S. debt continue, covering roughly three-quarters of total federal outlays. Mandatory programs don’t shut down. And when the government reopens, furloughed workers are paid retroactively, meaning much of the lost income and spending returns to the economy in short order.

For investors, that’s an important distinction. Shutdowns are inherently temporary, and markets know it. A federal funding impasse has yet to alter corporate earnings trends, long-term inflation trajectories, or consumer behavior in any meaningful way. In fact, markets often rise during shutdowns precisely because investors have seen this story before and know how it ends. The government eventually reopens, paychecks resume, and the economic data catch up.

Some commentators have worried about the potential for a shutdown to weigh on consumer confidence or market sentiment. That’s possible in the short term, especially if the headlines grow louder and political rhetoric intensifies. But even in those cases, the effect tends to fade quickly. The same pattern has repeated across decades, with temporary volatility followed by quick stabilization as markets refocus on fundamentals.

Bottom Line for Investors

The question for investors, then, is: are the economic fundamentals still strong enough for markets to look through the shutdown?

In my view, the answer is yes. Growth has moderated from last year’s pace, but the economy continues to expand. The jobs market is showing signs of leveling off, but unemployment remains low. Business investment remains solid, thanks in large part to AI investment, and corporate profits are holding up well. Our colleagues at Zacks Investment Research have been noting for some time now that forward estimates continue to trend higher, signaling confidence in corporate America. The U.S. financial system also remains in fine shape, with healthy lending activity in a monetary easing cycle.

In this kind of environment, it takes more than a political impasse to derail the broader trend.

¹Wall Street Journal. October 1, 2025. https://advisor.zacksim.com/e/376582/-mod-economy-more-article-pos2/5tp38p/1340471816/h/oHCC4EptMjDjKBX9l32s0Ez55oiv-jRLalL68_h0dWM

²Fred Economic Data. October 6, 2025. https://advisor.zacksim.com/e/376582/series-SP500-/5tp38s/1340471816/h/oHCC4EptMjDjKBX9l32s0Ez55oiv-jRLalL68_h0dWM

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Oct 09

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Mitch Zacks – Weekly Market Commentary: Will a Steepening Yield Curve Boost Financials and the Broader Economy?

By BayTrust Financial Weekly Market Commentary

Conditions for a steepening yield curve are forming.

The Federal Reserve cut its benchmark fed funds rate by 25 basis points at its September meeting, and there are indications that more rate cuts are on the horizon. If the next few meetings go as many market participants anticipate, yields on the short end of the curve are poised to keep falling.

Meanwhile, yields on the longer end of the curve (10-year and 30-year U.S. Treasurys) have been steadily climbing. As seen on the chart below, 30-year U.S. Treasury bond yields recently brushed 5%, and the 10-year has remained above 4% all year.

As I wrote in a recent column, there are a few reasons to believe we could see sustained pressure on long duration bond yields. Debt issuance has picked up after the summer lull, increasing supply. Sentiment could also play a role—after years of near-zero interest rates and heavy central bank buying, investors have grown more sensitive to small shifts in expectations about growth, inflation, and policy. Expectations of lower growth and higher inflation can push yields up.

In that same column, I framed this dynamic as a potential positive. I argued that with central banks cutting short-term rates and long yields drifting higher, yield curves could be set to steepen, which is a classic marker of healthier credit conditions since it improves incentives for banks to lend. Remember, the basic business model of banking relies on borrowing money at short-term rates and putting it to work through longer-term loans. When the yield curve slopes upward, long rates exceeding short, banks have higher incentive to extend credit widely because the margin is in their favor.

The chart below shows the yield curve as the difference between yields on 3-month U.S. Treasurys and 10-year U.S. Treasurys. It’s clear that the yield curve has been flat for some time, but as outlined above, there’s a reasonably good thesis that we could see more steepening ahead.

A steeper yield curve is generally good news, but I want to be careful not to portray it as a definitive game-changer.

Although the correlation is relatively tight, banks’ lending margins don’t map directly to government bond spreads. Banks’ funding costs are shaped more by the abundance of deposits, swollen in recent years by pandemic-era fiscal transfers, than by short-term Treasury yields. Loan pricing, meanwhile, generally runs above long-term government yields, reflecting higher credit risk. This helps explain why loan growth (see chart below) has remained steady even during the curve’s inversion. In other words, banks did not suddenly stop lending when the curve flipped upside down, so it’s unlikely that merely un-inverting will spark a dramatic new lending boom.

To be sure, a modestly positive slope can provide a tailwind for Financials stocks, and it may offer some incremental support to credit creation. But as a barometer for the U.S. economy overall, the curve’s current steepening is more symbolic than fundamental. The bigger picture is that lending activity never really faltered, and the economy has kept grinding ahead despite widespread worries.

Bottom Line for Investors
A steepening yield curve is positive, and it can add some support for Financials. But I do not think we’re in a place in this cycle where a steeper curve will fundamentally alter the economic outlook. The U.S. economy remains sturdier than many appreciate, with strong employment and steady loan growth underscoring that resilience. For investors, a steeper yield curve is something to celebrate, but it’s not a panacea for weakness that could emerge elsewhere in the economy.

¹Fred Economic Data. September 30, 2025. https://advisor.zacksim.com/e/376582/series-DGS10-/5tn8sy/1333099486/h/geOAQyKBeBZ__09SQgDnxopD9r5IOqVUKxnO9oVEqrE

²Fred Economic Data. September 30, 2025. https://advisor.zacksim.com/e/376582/series-T10Y3M-/5tn8t5/1333099486/h/geOAQyKBeBZ__09SQgDnxopD9r5IOqVUKxnO9oVEqrE

³Fred Economic Data. September 26, 2025. https://advisor.zacksim.com/e/376582/series-TOTLL/5tn8tc/1333099486/h/geOAQyKBeBZ__09SQgDnxopD9r5IOqVUKxnO9oVEqrE

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Oct 03

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Mitch Zacks – Weekly Market Commentary: The 4 Risks Investors Should Worry About Most

By BayTrust Financial Weekly Market Commentary

Barring a sharp correction in the next few trading sessions, U.S. stocks are likely heading into the fourth quarter near all-time highs. I’ve made the case previously that steady, although fairly modest, economic growth paired with resilient earnings has supported prices to date. With the Federal Reserve poised to ease monetary policy as the economy expands, there is not a great case for being outright bearish.¹

But that does not mean risks are low. Below, I outline four that I think investors should be keenly watching in the next quarter and beyond.

Risk #1: A Second Wave of Inflation

Among institutional investors, recession fears dominated earlier this year, particularly following the “Liberation Day” announcement. Today, it’s inflation that is again the top concern. August CPI data underscored this concern, with inflation coming in hotter-than-expected. The risk here is that the Fed will again have to reverse course, just as the market is baking in expectations for several rate cuts.

Prices for some goods may rise, especially where tariffs hit. But without the monetary backdrop to sustain a broad-based surge, the specter of runaway inflation looks overstated, in my view. Broad money supply growth in the U.S. remains tame (see M2 money supply chart below), though the trend line will be worth watching closely in the months ahead.

Source: Federal Reserve Bank of St. Louis ²

Risk #2: Concern Over Federal Reserve Independence and U.S. Dollar Weakness

Fed policy is always political to some degree, given that appointments come from the White House and confirmations from the Senate. Removing Fed governors because of a disagreement over policy would be a major concern, but the Supreme Court already reaffirmed this year that such an act would be illegal. Public criticism of rate policy may seem threatening, but it’s also nothing new, and there is little evidence it has swayed decision-making from the Federal Open Markets Committee.

As for the dollar, “de-dollarization” chatter resurfaces regularly, with Russia, China, or the BRICS bloc often floated as challengers. Yet data show the dollar still comprises more than half of global currency reserves, and it is involved in nearly 90% of all foreign exchange transactions. No other currency matches the U.S. dollar’s liquidity, stability, and global reach. Over time, the dollar’s share may fluctuate, but fears of sudden debasement or collapse look misplaced.

Risk #3: Over-Concentration

Tech remains the market’s favorite sector, with AI-related companies driving much of 2025’s gains. In my view, this enthusiasm reflects strong fundamentals. Q3 2025 Tech earnings are expected to rise over 12% year-over-year on similarly strong revenue growth.

But with enthusiasm comes concentration. When too much capital chases the same trade, markets become vulnerable to abrupt reversals if sentiment shifts. For now, earnings support remains solid, but this is a reminder of the importance of diversification. Overcrowding isn’t a reason to avoid strong companies, but it does raise the odds of volatility if momentum cools.

Risk #4: Rising Long-Term Bond Yields

The summer saw 30-year yields in the U.S., U.K., France, and Germany climb to multi-year highs, sparking a wave of debt-crisis headlines. In Britain, rising gilt yields were pinned on budget concerns. In France, an offhand remark about an IMF bailout got blown out of proportion. In the U.S., some tied higher yields to worries about refunding tariffs should courts strike them down.

But a closer look reveals that rising long yields is a global issue. Italy, Spain, Canada, and Australia all saw long-term yields rise in tandem. In my view, and as I’ve written before, this trend is less about country-specific fiscal woes and more about sentiment flowing through interconnected global bond markets. Historically, modest increases in long rates alongside central bank rate cuts steepen yield curves, which is a setup that can support lending and growth.

Bottom Line for Investors

It’s a mixed bag right now for investors. Many are growing more bullish as 2025 closes, but worries also remain. Inflation, Fed independence, dollar stability, crowded trades, and rising yields all top the list. But it’s also true that these risks are widely known and widely discussed, which in my view reduces their power to derail the bull market.

For long-term investors, the persistence of these worries ultimately creates a constructive backdrop. Earnings continue to hold up, the Fed has begun easing, and the economy is chugging along despite headwinds. Volatility may flare if one of these worries dominates headlines again, or if the risk comes to fruition in a worse way than expected. That’s why I’m urging investors to stay focused on them.

¹TrustNet. September 16, 2025. https://advisor.zacksim.com/e/376582/ite-record-overvaluation-fears/5tmj31/1326236343/h/GiShj21LxhtbTDGNKyNnyarlFm8_dLP4EUXm8RxlG2U

²Fred Economic Data. September 23, 2025. https://advisor.zacksim.com/e/376582/series-WM2NS-/5tmj34/1326236343/h/GiShj21LxhtbTDGNKyNnyarlFm8_dLP4EUXm8RxlG2U

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Sep 24

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Mitch Zacks – Weekly Market Commentary: The Fed Cuts Rates, But Remember What Really Moves Markets

By BayTrust Financial Weekly Market Commentary

The Federal Reserve cut rates by 25 basis points last week, a widely expected move that I would argue was priced into markets weeks, if not months, ago. Readers should expect the media and Fed prognosticators to spend the next several weeks debating the size and frequency of future cuts.

From an investment perspective, however, there are far better ways to spend your time.

I’d start by parsing the economic backdrop against which the Fed made its move. Last week brought a pair of reports that I would label as “stagflation-light.” Consumer prices in August accelerated slightly faster than expected, with core CPI rising 3.1% year-over-year. At the same time, labor market figures showed more weakness than previously thought. A major revision reduced payroll gains by nearly a million jobs from prior estimates, and August’s unemployment rate ticked up to 4.3%. Payroll growth slowed to a trickle, with June even registering a net job loss after revisions. A headline in the Wall Street Journal this week summed it up: “More Americans are Stuck with the Jobs They Can Get, Not the Ones They Want.”¹

Taken together, the view from 30,000 feet suggests that while the job market isn’t collapsing, the days of “goldilocks” balance, low inflation, and strong job growth, are clearly behind us.

This combination does not amount to stagflation in the 1970s sense, however, with runaway inflation and high unemployment. Instead, it looks more like stagnation: a slow patch where growth cools, inflation runs a bit hotter than policymakers would like, and businesses hesitate to make longer-term investments. Consumer spending is still positive, and business outlays on areas, like intellectual property and AI infrastructure, remain robust. This results in a picture of an economy experiencing ‘muddle-through’ growth—not great, but not dismal either.

Against this backdrop, the Fed’s quarter-point cut looks less like the start of an aggressive easing cycle and more like a recalibration. Policymakers appear to be acknowledging that tariff-related inflation pressures are likely a one-time shock rather than the start of a lasting upward spiral. At the same time, they are signaling an awareness that labor market weakness is mounting. The Fed’s updated projections will show just how seriously they are weighing those risks. But whether this cut turns into a series of cuts will ultimately depend on the data in the coming months.

For investors, the key point to come back to, in my view, is that monetary policy is not the main driver of stock prices. Earnings remain the heartbeat of equity markets, and here, the outlook is broadly supportive. With the Q2 reporting season effectively in the rearview mirror, S&P 500 earnings are on track to have risen +12.1% from a year earlier on +6.1% revenue growth. Looking ahead, Q3 earnings for the index are expected to climb another +5.1% on +5.9% higher revenues. Importantly, estimates have been revised upward in recent weeks, as seen in the chart below.

To be fair, the earnings picture remains top-heavy. Strip out Tech’s contribution in the coming quarter, and S&P 500 earnings growth would be closer to +2.1%. This unevenness raises the odds that actual results could disappoint relative to rising expectations, particularly in sectors under pressure like Medical, Transportation, and Basic Materials.

Still, the overall revisions trend is positive, which is not what you would expect if the economy were tipping into recession. Yes, the economy is slowing, and yes, tariffs are creating headwinds. But corporate America is still finding ways to grow, and earnings power is intact.

Bottom Line for Investors

Shifting the focus away from the Fed decision is not meant to totally diminish its significance. A lower policy rate can help steepen the yield curve and reduce some financing pressures, particularly in interest-rate-sensitive areas like housing or credit creation. But it would be a stretch to argue that one quarter-point cut will meaningfully change the economic cycle or override the market’s longer-term trend. The decision was telegraphed well in advance and priced in by investors weeks ago. That means the announcement itself carries little surprise power for markets.

More important is the economic backdrop, which I would characterize more as stagnation than stagflation. While policy uncertainty and weaker job growth may keep volatility elevated in the near term, corporate earnings remain the critical driver for markets, and the outlook for Q3 is encouraging at this moment.

¹Reuters. September 12, 2025. https://advisor.zacksim.com/e/376582/r-than-stagflation-2025-09-12-/5tl1m1/1320635682/h/Sk9R3dptH8K4_UDgkXGz6C-jhr5TPu_NGuh–53dZmw

²Zacks.com. September 10, 2025. https://advisor.zacksim.com/e/376582/nings-expectations-good-or-bad/5tl1m4/1320635682/h/Sk9R3dptH8K4_UDgkXGz6C-jhr5TPu_NGuh–53dZmw

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

BayTrust Financial

Mitch Zacks – Weekly Market Commentary: How AI Spending is Lifting U.S. Economic Growth, and What That Means for Investors

Mitch Zacks – Weekly Market Commentary: The “K-Shaped” U.S. Consumer Landscape

Mitch Zacks – Weekly Market Commentary: Investors Should Expect More Volatility in the Tech Sector

Mitch Zacks – Weekly Market Commentary: The Perils of Taking Private Markets Public

Mitch Zacks – Weekly Market Commentary: Dollar Doom? Markets are Telling a Different Story

Mitch Zacks – Weekly Market Commentary: Do Recent Bankruptcies Signal Systemic Credit Market Problems?

Mitch Zacks – Weekly Market Commentary: Why Markets Rarely Flinch at Government Shutdowns

Mitch Zacks – Weekly Market Commentary: Will a Steepening Yield Curve Boost Financials and the Broader Economy?

Mitch Zacks – Weekly Market Commentary: The 4 Risks Investors Should Worry About Most

Mitch Zacks – Weekly Market Commentary: The Fed Cuts Rates, But Remember What Really Moves Markets

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