Schwab strategists warn of a major market shift: The era of easy index gains is officially over

By Barbara Kollmeyer

The 'great moderation' is over. Welcome to the temperamental era of investing, strategists say.

Charles Schwab strategists Liz Ann Sonders and Kevin Gordon say we've entered the "temperamental era."

Investors have a way of looking past geopolitical storms, as the seesaw performance on Wednesday shows following the latest U.S.-Iran clashes.

Such tensions, though, may be here to stay, says our call of the day from Liz Ann Sonders, chief investment strategist at Charles Schwab, and Kevin Gordon, head of macroeconomic research and strategy at the financial-services company, who say we've entered what they dub the "temperamental era" that will bring more inflation volatility and supply shocks.

The Schwab strategists began pondering this three years ago as what they called the "great moderation" era - two decades of disinflation, suppressed volatility and reduced supply shocks - was over.

The new era should be somewhat similar to the period between the 1960s and the 1990s - marked by heightened inflation and economic and geopolitical volatility, with more recessions and robust expansions. They don't see a repeat of the extreme inflation volatility seen at the time but do say the Federal Reserve will have trouble achieving its 2% inflation target.

One relationship has already shifted, they noted.

The strategists' chart shows that the 30-day rolling correlation between the 10-year Treasury yield BX:TMUBMUSD10Y and the S&P 500 SPX has moved "decisively into negative territory highlighting that inflation risk is front and center again." Amid such a move, stocks tend to fall as yields rise.

They say central banks are ill-equipped to deal with supply shocks that come from geopolitical volatility.

Now for the playbook: "This new era may create a more volatile, dispersion-heavy environment that may favor diversification, flexibility, and factor-based investing rather than relying on the old playbook of broad index gains and a dependable Fed backstop."

Inflation will be a key variable, with tariff shocks, the Iran war and the artificial-intelligence build-out likely to cause "repeated, sharp, supply-driven spikes separated by disinflationary interludes." Sonders and Gordon suggest investors be flexible when it comes to locking money up in longer-term bonds if inflation is set to swing around. They also advise wariness in putting money into companies that are making growth promises much further in the future.

The strategists say investors are likely to get less diversification by putting money in bonds, with those prices falling as yields rise, driving stocks down.

The dominance of megacap stocks in major indexes such as the S&P 500 is also a consideration. The market may look "completely different" from the performance of the 10 biggest stocks, so investors should be more discerning when it comes to actively managing individual stocks and industries, they say.

Finally, investors need to face some realities around that Fed "put."

"Those accustomed to a central bank backstop should have open minds given inflation has been above the Fed's target for five-plus years, AI's productivity gains have yet to show meaningful downward pressure on inflation, and higher tariffs are likely here to stay," Sonders and Gordon say.

The markets

U.S. stocks SPX DJIA COMP have opened modestly higher, led by tech and oil prices (CL.1) (BRN00) are slipping.

 
Key asset performance                                                Last       5d      1m       YTD     1y 
S&P 500                                                              7482.71    -0.01%  2.97%    9.31%   19.47% 
Nasdaq Composite                                                     25,870.65  -0.65%  2.79%    11.31%  25.52% 
10-year Treasury                                                     4.579      8.90    10.70    40.70   22.80 
Gold                                                                 4117.4     -0.44%  -2.75%   -4.96%  23.53% 
Oil                                                                  73.59      7.49%   -14.85%  28.18%  10.05% 
Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The U.S. and Iran traded fresh strikes for a second day.

Weekly jobless claims totaled 215,000 versus an expected 218,000. Still to come are existing-home sales at 10 a.m.

New York Fed President John Williams is slated to speak at 9 a.m. and Dallas Fed President Lorie Logan at 1:30 p.m.

The Treasury will announce the result of its $22 billion 30-year bond auction at 1 p.m.

Micron (MU) announced it will invest up to $3 billion to boost the U.S. semiconductor ecosystem. Shares are climbing.

PepsiCo stock (PEP) is up after a narrow earnings beat.

Levi Strauss (LEVI) lifted its full-year sales and adjusted earnings outlook for a second straight time, but shares are dropping.

AstraZeneca shares (AZN) and those of partner Ionis Pharmaceuticals (IONS) are tumbling on a disappointing late-stage heart disease drug trial.

'Hysteria' grips San Francisco's housing market as AI wealth pours in.

The chart

The chart from Goldman Sachs shows estimated oil flows through the Strait of Hormuz, which stand at 42% of levels seen normally. A team of strategists led by Yulia Zhestkova Grigsby say recent tanker attacks "highlight still elevated risks of crossing," which could weigh on near-term traffic. Discussing risks ahead and fresh strikes between the U.S. and Iran, they say that if the 60-day negotiation window remains open, with a reinstated waiver for Iranian oil and security guarantees for shippers, flows should recover by the end of July.

Top tickers

These were the most searched ticker symbols on MarketWatch as of 6 a.m.:

 
Ticker  Security name 
NVDA    Nvidia 
MU      Micron 
SPCX    SpaceX 
TSLA    Tesla 
TSM     Taiwan Semiconductor Manufacturing 
AMZN    Amazon 
AMD     Advanced Micro Devices 
AAPL    Apple 
MSFT    Microsoft 
INTC    Intel 

For the first time, scientists watch the birth of a new seafloor.

-Barbara Kollmeyer

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(END) Dow Jones Newswires

07-09-26 0937ET