Gundlach Warns: If Fed Holds Rates, Long-Term Yields Will Surge

By Dong Jing

"Bond King" Jeffrey Gundlach issued three major warnings ahead of the Federal Reserve's rate meeting: if the Fed does not hike rates, long-term yields will soar; inflation's trajectory bears an eerie resemblance to the 1970s; AI bond spreads have nearly doubled, while U.S. stock valuations are as high as "a hotel minibar—no bargains."

Ahead of next Wednesday's FOMC meeting, DoubleLine Capital CEO and CIO Jeffrey Gundlach, in the latest episode of his "Gundlach Unlocked" livestream, systematically outlined the current macroeconomic landscape, issuing a series of warnings on interest rates, inflation, credit markets, U.S. stock concentration, and the dollar's trajectory.

Gundlach said during the program that he is skeptical the Fed will hike rates next week, even though the market has priced in about a 60% probability of a hike. He stated clearly: "I would not be surprised if the Fed does not hike next week. If that happens, I expect long-term rates to rise quite significantly afterward." Conversely, if the Fed does hike, the bond market may remain at current levels.

This judgment is based on his deep concerns about the current inflation situation and his continued vigilance over the U.S. fiscal trajectory. Using extensive data, he pointed out that with inflation remaining high and the U.S. fiscal deficit severely out of control, the U.S. Treasury market, U.S. stock valuations, and the red-hot AI corporate bond market are all at extremely fragile historical junctures.

If the Fed "holds steady," long-term rates could face a massive shock

Regarding next week's FOMC meeting, Gundlach believes the Fed's pace is once again out of sync with bond market pricing. He noted that from the short end of the yield curve, the market sees about a 60% probability of a Fed hike, but he is cautious about this.

"I would not be surprised if the Fed does not hike next week. But if that happens, I expect long-term rates to rise quite significantly after the Fed meeting. If they do hike, then the bond market may stay at current levels," Gundlach said.

He presented his own baseline model for the 10-year Treasury yield (based on the German 10-year bund yield and the 7-year average of U.S. nominal GDP). The data shows the model currently indicates the 10-year Treasury yield should be around 4.71%, while the actual value is 4.78%, suggesting yields are in a reasonable range. But he stressed that after a massive 500-basis-point rate hike, the market has not seen a real rebound, and "the path of least resistance is likely to continue upward."

Inflation has not disappeared; CPI trajectory is "strikingly similar" to the 1970s

Gundlach ruthlessly criticized the market's optimism about cooling inflation. He pointed out that the 6-month annualized growth rates of both core PCE and headline PCE are higher than their 12-month annualized rates, "Inflation has not really improved, and it is still far from the 2% target."

Even more worrying is the replay of history. Gundlach used overlay charts to compare the inflation trajectory since 2014 with the inflation surge from the 1960s to the early 1980s, warning:

"The current trajectory is strikingly similar to the inflation disaster before and during Volcker's tenure as Fed Chair. Whether we will continue to replay that inflation disaster's trajectory will be very interesting to watch."

In terms of data mining, Gundlach emphasized his most valued unadjusted, non-seasonal indicator—the import and export price index. Currently, U.S. export prices are up 8.25% year-over-year, and import prices are up 5.95% year-over-year.

"If you average the two, based on this purest inflation indicator, the actual inflation rate is about 7%." With Brent crude approaching $100 per barrel and global oil inventories at historic lows, he believes the floor support for oil prices will make inflation more stubborn than the Fed hopes.

In addition, he listed several inflationary pressure signals:

The Bloomberg Commodity Index has risen 34% since the war broke out at the end of February this year, recently rebounding from its 200-day moving average and approaching a 10-year high;

Residential electricity prices have climbed from about 12.5 cents per kilowatt-hour eight years ago to 18 cents, an increase of more than 50%, with no signs of slowing;

Brent crude is approaching $100 per barrel;

The Strategic Petroleum Reserve has dropped from a peak of 750 million barrels to 287 million barrels, a decline of more than 50%, the lowest level since the reserve was established; global oil inventories are also at their lowest since 2018—"This will continue to provide a floor for oil prices, making inflation stickier than the Fed would like."

Beware of secondary risks: AI corporate bond spreads widening sharply

In the credit market, Gundlach keenly captured a serious divergence that the market has overlooked: AI-related corporate bonds are facing heavy selling pressure.

Data shows that while overall investment-grade bond market spreads have changed little, AI-related investment-grade bond spreads have surged from 50 basis points to about 125 basis points, widening by 75 basis points; in the high-yield (junk bond) space, AI-related spreads have risen sharply from about 180 basis points to about 325 basis points.

"This is the huge divergence we really should be watching," Gundlach said. "Given the astonishing demand for AI and related businesses, this will undoubtedly put further pressure on AI spreads... The market is clearly struggling to absorb such massive supply, and AI bond supply will continue to come like an avalanche."

U.S. stock valuations near extremes; "an extremely concentrated market means extreme danger"

On equities, Gundlach issued his harshest bearish warning. He noted that the S&P 500's Shiller PE ratio has reached 42 times, a figure even higher than the bubble period before the 1929 Great Depression.

"At such PE levels, real returns over the next 10 years have never been positive. In fact, they tend to be significantly negative, at negative 5% to negative 9% per year. Therefore, broadly buying the market-cap-weighted S&P index at such Shiller PE levels means facing huge real losses."

He specifically highlighted the "distorted" boom in tech stocks. The information technology sector's weight in the S&P 500 has reached a record 38%, far exceeding the concentration before the 1999 dot-com bubble and the 2008 financial crisis.

"This is an extremely concentrated market, which means it is an extremely dangerous market. Therefore, I would not recommend any market-cap-weighted stocks."

Dollar and emerging markets: bearish on the dollar, bullish on EM stocks and local currency bonds

Gundlach holds a clearly bearish stance on the dollar. The dollar index (DXY) has fallen from a high of 110 at the end of 2024 to below 100. "Over the past year and a half, the dollar has barely seen any meaningful change; it almost looks manipulated," but he expects the dollar to continue weakening.

He cited historical data showing a high correlation between dollar weakness and emerging market (EM) assets outperforming U.S. assets. In the comparison chart he presented, the dollar trade-weighted index and the S&P 500 relative to the EM index show highly similar trajectories—"If the dollar falls, the S&P 500 is likely to underperform emerging markets."

Since the end of 2024, the S&P 500 has cumulatively underperformed emerging markets by about 20%.

He is also bullish on EM local currency bonds relative to U.S. corporate bonds, based on the same logic of expected dollar weakness.

U.S. debt and fiscal policy: $40 trillion debt looms; long-dated TIPS "cannot provide protection"

Gundlach pointed out that total U.S. public debt has reached $40 trillion (including holdings by the Fed and the Social Security system), and on the current trajectory, it could exceed $50 trillion by 2032.

Meanwhile, CBO projections show the fiscal deficit as a share of GDP will continue to widen, and current projections are based on relatively optimistic assumptions such as "interest rates below current levels, deficit ratios below current levels, and sustained positive real GDP growth"—"Once you stress these assumptions, it becomes clear we are on a path to a deficit-to-GDP ratio of 7% to 8% in less than a decade."

He also specifically clarified a market myth: some believe those bearish on nominal Treasuries should turn to long-dated TIPS as a hedge. Gundlach explicitly disagreed:

"Long-dated TIPS (30-year) have moved exactly in line with 30-year nominal Treasuries since late 2021, and the gap between the two has barely changed over the past five years. If you are bearish on nominal long-term Treasuries, there is no reason to believe 30-year TIPS will protect you. Don't think buying long-dated TIPS can hedge nominal Treasury risk."

He also expressed skepticism about the Treasury's recently announced bond buyback program, saying it is unlikely to have a material impact on long-term Treasury yields.

Below is the full transcript of DoubleLine CEO and CIO Gundlach's latest episode of Gundlach Unlocked (AI-assisted translation)

Thank you all for joining. This is our third episode of "Gundlach Unlocked," and I will share some macro themes, occasionally touching on micro topics. Interestingly, over the past three months, the S&P 500 has actually outperformed the Nasdaq. If you built a 60/40 portfolio using the Nasdaq instead of the S&P 500, the return would be only about 8%.

Let's begin. On screen is the Bloomberg Aggregate Bond Index's yield to worst, with data going back to the late 1990s. We can see that about four years ago, the index's yield was in a sideways range: the low end slightly above 4%, the high end around 5%, except for a brief spike in 2024.

There are several horizontal dashed lines on the chart representing average yields: - Blue line: 30-year average of 4.03% - 20-year average of 3.25% - Interestingly, the 10-year average is slightly higher than the previous 10-year average.

Therefore, current yields can no longer be called "suppressed"; there are real positive real rates in the Bloomberg Aggregate Index, which is certainly a good thing. Many of our funds still trade at premiums on this basis, and many funds currently have yields of 6%. If you choose higher-risk fixed income products, such as local currency EM bonds or bank loan indices, yields are around 7%.

This is quite competitive with equities—as we will see later, the stock market's Shiller CAPE is essentially at historic highs.

We are currently in an environment of rising long-term rates, a trend that has lasted six years and is about to enter its seventh. We can see that rates are rising almost in sync across countries, except Switzerland. Most notable is Japan, whose rates were suppressed near zero for years and have now risen to 3.97%, less than 150 basis points below the U.S. 30-year Treasury yield of 5.24%.

Rates are rising in sync across all developed countries, with the UK seeing the most significant yield increase.

We can see that the 30-year Treasury yield bottomed in 2020, which is also the bottom of this rising channel. The red line on the chart represents two standard deviations from the center line. From the incredible historic low of 27 basis points in 2020 to today's 5.24%, the 30-year Treasury price has cumulatively fallen more than 50%, and we are still near the peak, around 5.25%.

When a market moves sideways for a long time and cannot rebound, it often means one thing—we experienced a massive surge in bond yields, but prices barely retraced. Generally, if the market cannot rebound to correct a nearly 500-basis-point yield surge, it likely means the next direction will continue along the upward trend.

I built this model a long time ago to provide a baseline starting point for the 10-year Treasury yield. The tan line on the chart represents the actual 10-year Treasury yield, the dark line is the model fit, and the yellow line is the model's forward forecast.

The model is constructed by taking the German 10-year bund yield and combining it with the 7-year average of U.S. nominal GDP, which surprisingly provides a reliable reference point for the 10-year Treasury yield. Note the box at the bottom of the chart—the R² (goodness of fit) of these two lines is an astonishing 0.93. If calculated from 1990 instead of back to 1986, the R² would be even higher.

Currently, the model shows the expected reasonable level for the 10-year Treasury yield is 4.71%, while the actual yield is exactly 4.78%, very much in line with the model's forecast range. That said, the path of least resistance still appears to be upward, and we will explain why later.

I often talk about the relationship between the 2-year Treasury yield and the Fed, and they are once again showing some degree of "desynchronization." In 2022, we experienced a very severe desynchronization—when the 2-year Treasury yield was far above the Fed's near-zero rate, the 2-year Treasury yield was 200 basis points above the federal funds rate. That was the largest gap I have seen in my 42-year career.

Subsequently, we saw the Fed clearly move to the other extreme (directional divergence) in 2025. Now, judging from the position of the 2-year Treasury yield, the federal funds rate should be about 50 basis points higher than current levels. The Fed's monetary policy meeting is next Wednesday, and we will see.

The "Warp Function" used to measure the probability of Fed rate adjustments—based on the shape of the yield curve—shows that according to pricing at the short end of the Treasury curve, the probability of a Fed hike is about 60%.

However, there are some things about Kevin Warsh that I do not fully trust, so I tend to disagree with this 60% probability, although I do not have strong conviction on this.

I would not be surprised if the Fed does not hike next week.

If that happens, I expect long-term rates to rise quite significantly after the Fed meeting; if the Fed does hike, then the bond market may stay near current levels.

Next is a chart I also used in the last livestream, from J.P. Morgan Asset Management:

The vertical axis (Y-axis) is the ISM Manufacturing Prices Paid Index. When "prices paid" rises, people naturally expect the Fed to be more inclined to hike rather than cut rates.

The horizontal axis (X-axis) is the ISM Manufacturing Employment Index. When this index is above 50, people expect the Fed is more likely to hike; below 50, more likely to cut.

There are many small dots scattered on the chart: blue dots represent Fed rate cuts (easing), and orange-red dots represent Fed rate hikes (tightening).

Based on the original chart from J.P. Morgan Asset Management, I drew several rectangles and added some information:

In the lower-left rectangle, almost all the dots are blue, with only three or four exceptions. I am pointing at those three or four dots—those are the actions Paul Volcker took in early 1982, when he completely ignored the bond market and took proactive measures, sometimes acting impulsively, announcing rate adjustments without waiting for meetings. The most famous example is one Saturday night when he hiked rates by hundreds of basis points in one go, known as the "Saturday Night Massacre."

The upper-right rectangle represents another situation—within this range, one should expect to see more tightening actions because the prices paid index is high (indicating inflation) and the employment index is also high. Both aspects of the Fed's dual mandate point toward tightening monetary policy, and the chart indeed shows almost all orange-red tightening dots, with only about four blue exceptions. Those exceptions occurred during Arthur Burns' tenure, when he was pressured by the then-president to artificially keep rates low. Of course, that largely contributed to the U.S. entering a high-inflation era. We will see the relevant chart later.

There is a larger orange dot on the chart, located above the 70 line on the vertical axis and to the right of the 50 line on the horizontal axis. This somewhat indicates that if action is to be taken, the Fed should tighten rather than ease rates.

However, if you look at all the small dots around that large orange dot, you will find some are red and some are blue, with no clear conclusion. For the current specific stage, although there is no clear conclusion, I think there are slightly more tightening dots than easing blue dots.

Now we are starting to see some changes in bond market spreads. On the left side of the chart, the light blue line represents U.S. corporate investment-grade bond spreads excluding the AI sector, while the dark line represents AI sector spreads. One thing is quite clear: the broader investment-grade bond market has not seen any significant spread widening, but the AI market has experienced a massive spread widening relative to the investment-grade space. We see AI spreads widening from 50 basis points to about 125 basis points, a 75-basis-point widening during this period, while investment-grade spreads have not changed at all.

On the right side of the chart, we did the same analysis for higher-yield bonds, and the situation is even more dramatic—AI spreads widened from about 180 basis points to about 325 basis points, a significant widening. Meanwhile, non-AI high-yield bonds, represented by the light blue line, are actually near their historic lows for the year. So we are seeing a huge divergence, and this is exactly what we really need to watch.

As everyone knows, the U.S. Treasury is borrowing heavily with a fiscal deficit of 6% to 7% of GDP. Now, with AI and AI-related businesses generating massive financing needs, this will undoubtedly put further pressure on AI spreads. I really am not sure who is buying these AI-related bonds. Perhaps it is insurance companies held by private credit firms, which are in turn held by private equity firms that dominate the investment behavior of their insurance companies. But the market is clearly struggling to absorb such massive supply, and AI supply will continue to come like an avalanche.

Therefore, we are facing a situation where the Treasury is borrowing too much, plus corporations seem to have endless bond issuance needs, and the market—as clearly shown by the dark line on the chart—is starting to demand higher compensation.

I often hear people talk about comparing TIPS with nominal bonds, and we also like TIPS, holding them in some lower-risk funds. We prefer short-dated TIPS because we think the inflation expectations implied in the comparison between nominal bonds and TIPS are too low. They basically imply the Fed will immediately reach the 2% target and stay there, which I think is extremely unlikely, so I think short-end TIPS are undervalued.

But what I am showing on screen now is a comparison of long-dated TIPS, specifically 30-year TIPS versus 30-year nominal Treasuries. Many people say they like TIPS; I have even seen some guests who frequently appear on financial media talk about how they now like long-dated TIPS because they are bearish on nominal long-term rates, citing the Treasury's massive borrowing. But it is clear that these two lines are very similar. Just look at the bottom of the chart, which shows the difference between the two; you can see this difference has remained completely stable over the past five years.

So TIPS cannot hedge your risk. If you are bearish on nominal government bonds, there is no reason to believe 30-year TIPS will protect you, because since late 2021, their rates have risen exactly as much as nominal bonds. Please do not think that buying long-dated TIPS can somehow hedge your risk—if you are bearish on 30-year nominal government bonds.

Now let's look at the inflation situation. Kevin Warsh made it clear at the last press conference that 2% is their target and they will achieve it. He committed to using the PCE deflator to measure inflation. He cited the 12-month PCE deflator, correctly noting that the figure is 3.7%. He further pointed out that the 6-month annualized change in the PCE deflator is actually higher, meaning the increase over the past six months has been faster than the previous six months. Therefore, the PCE deflator has not really improved much. The 6-month annualized rate of core PCE is higher than the 12-month annualized rate, and both are far from 2%.

Let's look at the year-over-year data, including core and headline measures. Core inflation is 3.3%, headline inflation is 3.7%, and both appear to be trending upward since mid-2024, although the increases have stopped in the most recent reports. The next inflation data release will be very important to watch, because I think it will significantly influence the future direction of Fed policy.

The next chart is more for fun. We overlay the inflation experience from the 1960s to the early 1980s (measured by headline CPI). In the 70s and 80s, CPI rose to 12.5% at one point, then broke further above in the early 80s, approaching 15%. Then we have the recent rate hike experience from January 2014 to 2026. Surprisingly, the shape of the blue line (recent experience) is strikingly similar to the red line (the experience around the Volcker era). At least the blue line has turned, but whether we will continue to replay that inflation disaster will be very interesting to watch.

As everyone knows, my favorite inflation indicator is the import and export price index, because it is unadjusted, not seasonally adjusted, and purely price data. Currently, export prices are up 8.25% year-over-year, and import prices are up 5.95% year-over-year, both at quite high levels. Averaging the two gives about 7%. Therefore, based on this purest inflation measure, inflation is actually about 7%. No wonder consumer confidence is at such low levels.

This is the Bloomberg Commodity Index, which rebounded after a mid-year pullback, exactly bouncing off the 200-day moving average (red line). It currently looks like it is breaking above the highs of the past 10 years or more. On inflation, let's look at retail electricity prices for residential users. I don't particularly focus on year-over-year data; I'm just looking at this dark line, which is the price in cents per kilowatt-hour, about 12.5 cents eight years ago, now risen to 18 cents, a 50% increase. Moreover, this line shows no signs of slowing, which is another reason consumer confidence is hit, and why the current officials' poll numbers are not satisfactory.

Another inflation issue is, of course, oil. Brent crude, as the true global benchmark price, is currently near $100 per barrel. We can see that since the war broke out, the Strategic Petroleum Reserve has declined significantly and is now at its lowest level since the reserve was established in the 1980s. The reserve has now fallen to 287 million barrels, down from the previous high of 750 million barrels, a decline of more than 50%.

When the Strategic Petroleum Reserve begins to be replenished—which will inevitably happen at some point—it will provide a floor for oil prices and make inflation stickier than the Fed would like to see. But the issue is not just U.S. oil reserves. Look at global oil inventories, going back to 2018, about 10 years of data shows that the level represented by the dashed line is essentially at historic lows, comparable to 2025 levels. This further adds pressure to the floor support for oil prices.

This is a very interesting chart. It shows the performance of various asset classes since the war broke out at the end of February this year. The results we see are quite striking. Commodities, especially the energy sector, delivered excellent returns. The Bloomberg Commodity Index has risen 34% since the war broke out. Stocks also performed quite well, especially emerging market stocks, and the Japanese market also did well. Almost all assets performed well, achieving double-digit gains. The worst performers appear to be MSCI Europe and the UK, but basically all assets achieved double-digit or even over 20% gains. All commodities are rising, and as mentioned earlier, the Bloomberg Commodity Index is up 34%.

However, the bond market is in trouble. The best-performing bond category is leveraged loans, up only 3.1%. EM sovereign bonds also rose slightly, while investment-grade categories—government bonds, mortgage-backed securities, and corporate bonds—all recorded negative returns, with mortgage-backed securities seeing the smallest decline. This is very peculiar. We are seeing a huge "donut hole"—outer ring assets have rich returns, while fixed income has minimal returns.

Debt growth is clearly a problem. U.S. nominal GDP is represented by the blue line, and total U.S. Treasury public debt is represented by the red line. We can see that the red line is growing much faster than the blue line, especially since the global financial crisis, when it began to accelerate significantly, and there seems to be no end in sight; this trajectory will only get steeper. Currently, total debt, including holdings by the Fed and the Social Security system, has reached $40 trillion, and on the current trend, it could reach $50 trillion by 2032, which is almost certain.

Even more notable is that the Social Security Administration itself says that under the current funding and benefit system, Social Security will run out of money in 2032. Of course, their assumptions have always been too optimistic, which means we may actually face this problem in 2029 or 2030—at which point Social Security must be reformed, or benefits will have to be cut by about 22%. This is likely unacceptable to the baby boomers who have paid in for years and are still alive.

But let's wait and see. We face a very serious problem. And the situation is clearly not improving. This is the federal annual deficit by fiscal year, with data going back to 2021. We set a new record here—for a while this year, the fiscal 2025 deficit was slightly lower on a year-to-date basis. But it ultimately set a new high. The current "leader" is fiscal 2026, and this fiscal year is about to end. We will soon enter fiscal 2027, and it looks like this fiscal year will set another new record.

This is the federal budget deficit as a percentage of GDP, with data from the Congressional Budget Office's projections extending to 2035. The yellow line represents interest expense, and the gray vertical line on the right shows future projections, which are not optimistic. These projections are based on fairly optimistic assumptions—assuming interest rates below current levels, deficit-to-GDP ratios below current levels, and sustained positive real GDP growth throughout the projection period. Once you question these assumptions and apply some pressure, it becomes clear: on the current trajectory, the deficit-to-GDP ratio is likely to reach 7% or even 8% within 10 years, but still below 10%. This is certainly not good.

Gold's trend is quite similar to commodities. Gold experienced a strong rally in the first quarter of 2026, followed by a significant pullback, falling below $4,000. Now it is rising again. I think gold should be part of every portfolio. And it is clear that as the dollar weakens, central banks and institutional investors generally prefer to hold gold over fiat currencies.

Now let's look at this chart—the Shiller PE ratio is currently at 42 times. It was higher in 1999, but not by much. We can see that we have data going back to the 1870s, and the current level is far above the 1929 bubble period. Therefore, stocks are absolutely not cheap. This is a very interesting study.

This is a scatter plot covering data from 1965 to 2015, showing future 10-year real returns based on the CAPE ratio (cyclically adjusted price-to-earnings ratio). There is a downward-sloping regression trend line on the chart. It is clear that when the CAPE ratio is at current levels (currently 42 times), future 10-year real returns have never been positive. In fact, real returns are significantly negative, averaging about negative 5% to negative 9% per year. This means buying market-cap-weighted S&P index stocks at such CAPE levels will result in huge real losses. Interestingly, at historically lower PE levels, there have also been many instances of large negative real returns, which seems somewhat counterintuitive. However, over the past 15 to 20 years, we have become accustomed to higher PE levels than in the past. Nevertheless, this is absolutely not an endorsement of heavy market-cap-weighted stock positions; quite the opposite.

In fact, I do not recommend any of the above. Interestingly, stock market concentration is very high, and with the growth of tech and AI, this is understood by everyone. Here, we can see a light blue line representing the weight of information technology stocks in the S&P 500, and then this light blue line suddenly disappears. The dark blue line represents the sector with the largest weight. This means that since 2008, tech stocks have been the largest weight in the S&P 500, currently reaching a concentration of 38%, a level that not only exceeds the peak concentration of the top sector in 1999 but is also far above the level before the global financial crisis. Therefore, in the S&P 500 market-cap-weighted index, there are not many real bargains, just like there is nothing affordable in a hotel minibar.

Here, we see the historical trend of market concentration, going back to the railroad era. I cannot guarantee the accuracy of data around 1840, but if we look at the 1920s, the "Nifty Fifty" of the early 1970s, the 1987 stock market bubble, the situation before the 1999 dot-com bubble burst, and now the market conditions brought by the AI giants. This is an extremely concentrated market, which also means it is an extremely dangerous market. Therefore, I would not recommend any market-cap-weighted stocks.

Some changes have also occurred in the internal mechanics of the stock market. Here, we see the rolling 120-day return correlation between the AI sector and the S&P 500 excluding AI. From 2021 to 2025, and even into the first half of 2026, the correlation between the two was quite high. However, over the past few months, this has changed significantly. If calculated at 20 trading days per month, this is roughly equivalent to an average of six months. Now the two have become negatively correlated.

This is interesting—when the AI market performs well, the rest of the market moves in the opposite direction. Currently, the two show a slight negative correlation, dropping from about 0.5 earlier this year to negative 0.14 now, and the trend is strong. Therefore, I do not think this will reverse soon.

It is worth noting that the equal-weighted S&P 500 has started to outperform the market-cap-weighted index. This chart starts in 2017, but the equal-weighted index began outperforming about a year to a year and a half ago. Once a trend starts to show signs of possible reversal, we can look back at 2020—there we can see that the relative performance of market-cap-weighted versus equal-weighted began to move sideways, followed by a significant correction, with equal-weighted significantly outperforming. Now the equal-weighted index has started to outperform, although not enough to be fully convinced this is the start of a major trend, but at least it is no longer lagging.

In addition, U.S. stocks are no longer outperforming other global markets. When this line rises, it means U.S. stocks are stronger relative to non-U.S. stocks; when it falls, it means non-U.S. stocks are outperforming. Over the past year and a half, this line has basically moved sideways, but U.S. stocks have clearly stopped outperforming. From a shorter time frame, the same chart shows this actually began nearly two years ago—the relative strength of U.S. stocks peaked nearly two years ago, and there was a considerable relative lag from mid-2025 to the first quarter of 2026. I think from a trend perspective, this line will continue to decline in the future. Therefore, I think it makes sense to think from a long-term perspective rather than just a short-term one. Regarding foreign stocks, I have invested in foreign stocks before. But now, I want to shift focus back to more recent options, because I do not like the current market risk landscape.

The dollar has been falling since late 2024, when the dollar index (Dixie Index) was at 110, and has since broken below 100, currently hovering just below 100. Its movement is unusually smooth, almost looking manipulated. I mean, for over a year, it has barely experienced any meaningful change.

But interestingly, as the dollar falls, we see non-U.S. stocks starting to outperform, and global price-to-book ratios are severely imbalanced. This is an argument against U.S. stock valuations. The MSCI USA index has a price-to-book ratio of 5.72, while other regions (excluding the U.S.) have a price-to-book ratio of only 2.49.

You might think the U.S. is the best investment target in world history, but you will notice that in certain periods, especially during market corrections, the brown line and light blue line on the chart tend to converge, causing the MSCI USA index to significantly lag the MSCI World index.

Looking again at the S&P 500 versus the MSCI Emerging Markets index, the lag is quite obvious. U.S. stocks' outperformance ended in late 2024, and they have now lagged by about 20%, which is not insignificant.

I further believe this gap will continue to widen in the future. Here is the relative performance of the S&P 500 versus the MSCI Emerging Markets index, represented by the red line. When the red line rises, it means the S&P 500 is outperforming the EM index; when it falls, it means EM is outperforming the S&P 500. The blue line is the Fed's trade-weighted nominal broad dollar index. You can see the shapes of the red and blue lines are very similar. Therefore, if the blue line (the trade-weighted nominal broad dollar index) falls, the S&P 500 is likely to underperform emerging markets.

I am also very sensitive to seasonal factors now. It is early September, and September and October are usually difficult months for risk assets, which is one reason influencing my upcoming recommendations.

Looking again at the U.S. local bond market, this is the bond market situation, comparing total returns of U.S. corporate bonds with the J.P. Morgan EM local currency index, where the brown line represents the local currency index's performance relative to the Bloomberg total return.

Here I have a dark line representing the dollar index (inverted), so when the blue line rises, it means the dollar is falling. Again, the shapes of the brown and blue lines are very similar. Therefore, if the dollar falls (which I expect), we expect EM local currency bonds to outperform U.S. corporate bonds.

Alright, with all that said, let's enter the holiday season. Thank you all for joining this call, thank you for your support of DoubleLine, goodbye!