Over the last two decades, the James Bond cinematic universe has been taking itself a lot more seriously. The latest installment of the 007 franchise, which was released from 2006 to 2021, dialed down the old Bond tropes like death-defying stunts accompanied by cartoonish sound effects, impeccable invincibility, far-fetched tech, and trivial puns. Instead, the Daniel Craig-era replaced the playful, bubbly glamour of legacy Bond with a darker, grittier, and more fallible motif.
In a 2012 interview, Daniel Craig was asked about this rougher reality for Bond. He blamed the popularity of the Austin Powers trilogy from the late-1990’s, saying that the Mike Myers Bond parody films made it “impossible to do the gags” that had become characteristic of the Bond franchise. Craig said that the Bond filmmakers had to “destroy the myth” of the old Bond so that moviegoers wouldn’t roll their eyes at the repetition of any tired tropes, which even included a rejection of the “shaken not stirred” martini ritual in Craig’s first Bond film, Casino Royal.
This necessity to adapt an approach due to a major shift in the market perception is relevant not just to the Bonds of spy movies, but to the bonds of investment portfolios (a Moore and Connery-level punny segue, we admit). Higher bond yields have ushered in a transition similar to Bond’s, with higher rates forcing this market to shake off its playful, bubbly motif in exchange for a darker, grittier overlay.
This week we presented our 4Q26 macro and market outlook, where we looked at the setup for the economy and different asset classes through the lens of higher rates, or through the “Eye of the Bondholder” (we also included references to the classic N64 Bond game Goldeneye, for those who mastered the secret passages in Complex and “slappers only”). You can access the replay and the slides at the top and bottom of this email.
In the outlook, we devoted time to understanding the reason for the jump in rates in recent months, arguing that understanding the “why” was critical to projecting the future path and impact of higher rates. These reasons for the “why” of higher rates included global fiscal concerns, sticker inflation, stronger real growth (which combined with inflation drives stronger nominal growth), and a resilience in equity markets that had been giving investors little reason for “flight to safety” assets like government bonds.
This last point has been “cast in sharp relief” over the last three trading sessions, as bonds rallied (yields fell) and equities sold off. The bond strength and equity market weakness came on the back of hot inflation prints for both CPI and PPI, which one might think would cause a rise in yields. But these inflation concerns were overshadowed by concerns that the higher cost of capital/tighter financial conditions (that could persist due to stickier inflation) could challenge the sustainability of the AI infrastructure trade that has been the dominant driver of equity market strength in recent years. With major AI-driven indices and assets experiencing sharp sell-offs, multi-asset investors have finally been given a reason to seek safety in bonds.
This bond rally on hot inflation data is not the only source of cognitive dissonance in this market. The weakness in AI-related stocks is also causing investors to have to wrestle with the contrast of weak price action in areas of the market where analysts are the most bullish for earnings growth into 2027.
Analysts have expectations for powerful growth in 2027 after a huge 2026 for semiconductor stocks, with SOX index EPS expected to grow 48% in 2027 after delivering 140% in 2026. Semiconductors are the largest industry group in the S&P 500, at a nearly 19% weight, so the future path of the earnings for this group is incredibly important for the overall S&P 500 index numbers (which are expected to grow 16% in 2027 after 36% growth in 2026).
We are adherents to the market maxim that “price leads data”, so the recent weak price action deserves our imagination for what could challenge this uber-bullish outlook for semiconductor earnings, even as companies in the space speak of demand significantly outstripping supply at least for the next year.
But there is another market maxim that “narrative follows price”, meaning market participants will create bullish or bearish narratives in reaction to strong or weak price action. When narratives build on themselves, prices can overreact to the fundamental reality.
So, which one is it? Are semiconductor prices leading an eventual deterioration in the fundamental data or are prices overreacting to “doomer” narratives? The unsatisfying answer is likely both, with the former playing out in the medium term and the latter playing out in the short term.
The recent technical price weakness in equities, both AI- and non-AI-related, is being confirmed by weakness in credit markets, which suggests rising concerns across the “capital stack” that the higher cost of capital (meaning higher interest rates) are weighing on borrowers’ ability to access capital that they need to grow or sustain their businesses. This suggests that the equity market weakness is not just a correction in valuations, but a potential reassessment of growth outlooks.
A reassessment of growth outlooks implies that, at the least, that the market is concerned that current earnings forecasts for 2027 and 2028 may not have much incremental upside from today’s levels, or worse, could be headed for decline. Of course, if this fear of peak earnings proves to be incorrect, as it arguably did back at the end of 2025 and beginning of 2026, then recent price weakness will be a buying opportunity.
In consider the weak technical price action, we must acknowledge that major indices like the SOX are close to being oversold (using an RSI) and are nearing major support (at the 200 day moving average). This increases the probability of a tactical bounce (a short term recovery rally), which will have to be judged to determine if it is sustainable or just a countertrend move in a brewing downtrend.
This weakness in equities and credit traces its roots back to higher bond yields and the concomitant tightening in financial conditions. Higher bond yields are forcing investors, even in the most exciting growth areas, to reassess the underlying health and viability of business models and demand more compensation in return from the riskiest players. And with the AI infrastructure ecosystem relying on ample access to capital to fuel growth, this reassessment of risk could potentially become a self-fulfilling prophecy, where worries about future growth act to slow actual growth.
So, just as Austin Powers forced the James Bond filmmakers to reassess their approach to the franchise, higher bond yields are forcing investors to reassess their approach to investing in risky, capital-hungry assets. We should take inspiration from the Bond films’ ability to be adaptable to changing market sentiments instead of wishing we could go back to the way things were (no matter how cool the invisible Aston Martin was), finding investment opportunities that can thrive in this higher cost of capital world.
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