Stocks started the week on a down note yesterday as both oil and Treasury yields ticked up.

Middle East concerns have been a constant overhang on the market for most of the year. But stocks have been able to look past it. There have been plenty of bouts of volatility along the way. But in spite of it all, stocks have soared to new highs, and the economy continues to thrive. That's evident with the expanding labor market, increased productivity, and rising GDP. (The latest GDPNow forecast from the Federal Reserve Bank of Atlanta puts Q3'26 GDP at 5.0%, which would be the fasted pace since Q2'21.)

And corporate America is doing great as well. Q1'26 earnings season saw S&P 500 earnings up 25.8%; Q2 was up a whopping 45.5%; Q3 earnings season, which starts in just a couple of weeks, is forecast to be up 23.9%; and Q4 is forecast at 26.3%. Pretty incredible. And it illustrates why stocks have been able to shake off the negatives.

Rising Treasury yields are another headwind. But as I've said here before, I contend that rising yields, such as the 10-year eclipsing 5% (5.24% as of yesterday), are not the equities' killers some are fearing.

The Fed's latest Summary of Economic Projections (SEP), is forecasting one more 25 basis point hike by year's end, putting the Fed Funds rate at 4.1%. But the SEP also sees rates staying at 4.1% in 2027, which suggests just one more and done.

What's important to know is that over the past 40 years (1985-2025), the spread between the Fed Funds Rate (FFR) (currently at 3.88% midpoint) and the 10-yr has historically been 100 to 150 basis points. The median is 120 bps.

In 2025 the spread was 25 to 75 bps. Currently, the spread is 136 bps, which is right around the historical norm. If the FFR rises to 4.1%, which is expected, that would put the spread at 114 using today's 5.24% for the 10-yr. If the spread maintained its historical median of 1.20, that would put the 10-yr at 5.30%.

The point is, I'm not expecting the 10-year to rise forever. Nor am I expecting the FFR to shoot up much more than expected either.

The rise in yields, in my opinion, is simply a reversion to the long-run median spread of 120 bps.

In other news, yesterday's Dallas Fed Manufacturing Survey showed the General Activity Index coming in at 9.8 vs. last month's 11.6 and views for 6.0. The Production Index jumped to 29.5 vs. last month's 16.1.

Today we'll get the Case-Shiller Home Price Index, Consumer Confidence, and the Job Openings and Labor Turnover Survey report (or JOLTS for short).

But the main events this week, economic report-wise, are tomorrow's Personal Consumption Expenditures (PCE) index (which is the Fed's preferred inflation gauge) followed by Friday's Employment Situation Report by the Bureau of Labor Statistics (BLS).

Those two reports will help inform the Fed's next interest rate move, when they meet again on October 27-28.

In the meantime, the week is young. The major indexes are coming off of a weekly gain (that's two up weeks in a row for the Nasdaq) with the momentum on the bull's side. And with the beginning of Q4 just days away (Q4 is historically the best quarter of the year for stocks -- since 1950, the S&P has gone up 79% of the time, with an average gain of 4.1%), that bodes well for more gains to come.

See you tomorrow,