At 5.15%, the 10-Year Treasury Picks the Winners

Dear readers,

The 10-year Treasury yield jumped about 0.3 percentage points this week to 5.15%, and nearly everything else in the market is now priced off it. Stocks finished the week higher, but the bond market set the tempo. After the hot inflation data, a Fed rate hike in December is considered all but certain. In that setting, investors are paying for companies that earn their money today, not for those that promise it later.

Breadth Wins, the Leaders Wobble

The S&P 500 gained 2.5% for the week, its first weekly advance after four straight losses. The index also bounced off its 40-week moving average. The leaders, though, were the usual suspects.

AMD and Broadcom topped the list of winners with gains of a good 18%, then both fell sharply on Friday. AMD dropped 8.8% to $534.06, and Broadcom lost 4.8% to $347.01.

The more telling shift is happening below the index level. The equal-weighted S&P 500 has beaten the regular index by almost eight percentage points since October 6, which points to a broader base. Global equity funds also took in about $98 billion, the most since June. Money is still flowing into stocks, but increasingly into more of them.

That matters because inflation is not fading. US producer prices are up 6.5% from a year ago, the highest reading since November 2022. Investors paying up now want earnings that can absorb a higher rate.

Berkshire: A Record High on $377 Billion in Cash

Berkshire Hathaway is the textbook case of this rotation. Its Class B shares closed Friday at a record $592.94. They are up 19.1% since early October, including 3.9% this week, ahead of the broader market.

The conglomerate held $377.4 billion in cash as of September 30 and repurchased $9.6 billion of its own stock in the third quarter. It also issued another yen bond, worth more than 182 billion yen, with coupons between 2.6% and 4.6%. The stock trades at 16.55 times earnings.

The pitch to investors is simple. In a period of rising rates, Berkshire offers valuation discipline, a cash cushion and buybacks instead of growth promises. The catch is equally simple. After a gain of nearly 20% in a few weeks, the entry discount is gone.

Europe: Siemens Energy Delivers, Stellantis Warns

Germany’s DAX hit a new record high this week. German inflation fell to 2.8% in October from 3.3% in September, a sharp contrast with the US.

The most concrete cash-flow story comes from Siemens Energy. Adjusted fourth-quarter revenue rose 21.5% to about €12.8 billion. Net income reached €1.36 billion, up from €236 million a year earlier.

Should investors sell immediately? Or is it worth buying Cisco?

The company tripled its dividend to €2.30 and announced share buybacks of up to €9 billion through fiscal 2030. The stock closed Friday near €132, for a market value just under €113 billion. Allianz also posted a record, with operating profit of €14.1 billion after nine months.

Stellantis is the mirror image. The automaker warned of rising costs in 2027 and 2028. The shares lost more than 12% this week and closed Friday at €3.49, a 52-week low. They are down 62% over twelve months. A cheap price is no substitute for a credible earnings outlook.

Defensive, Yes, but Not at Any Price

Asset manager Goshawk is favoring health care and consumer staples over software, which it sees as vulnerable to cheap AI applications. Its favorites include Thermo Fisher, Agilent, Merck and AbbVie. A Telenor position offers a dividend yield above 7% in Norwegian kroner. Eli Lilly also hit a record high on Friday, and Apple closed at $356.27, near the year’s high set the same day. Apple is up 31% year to date.

Goshawk also flags a trap. If bond yields climb from 3.5% to 5.0%, as they did in France over the past five months, high-dividend stocks risk a loss of roughly 30%. With 10-year US yields above 5%, that is no abstract exercise. Defensive should not mean chasing the highest dividend. It should mean balance-sheet strength and earnings growth.

Cisco: Strong Numbers, but Price Matters

Cisco shows how coldly the market is calculating. First-quarter revenue rose 24% to $18.5 billion. Adjusted earnings per share came in at $1.40, above the consensus of $1.33. The company raised its fiscal 2027 revenue forecast to a range of $74.8 billion to $75.8 billion. It now expects $9 billion in AI orders from large cloud customers, up from $7.5 billion.

The stock still fell 6.2% on Friday to $95.64. Adjusted gross margin slipped to 65.6% from 68.1% a year earlier, because of pricier memory chips. Product order growth slowed from 35% to 21%. The shares trade at about 17 times fiscal 2027 earnings.

Cisco remains a solid payer, with a quarterly dividend of $0.42 (a yield of roughly 1.8%) and $2 billion in buybacks during the quarter. But the market now demands that revenue growth show up in margins.

Outlook

Monday brings the Empire State index and a speech by Fed Chair Kevin Warsh at 6 p.m. CET (noon Eastern). Together they should show how firmly the Fed is preparing its December move. On Tuesday, Nvidia reports earnings. On Thursday, Take-Two releases “Grand Theft Auto VI,” for which Morgan Stanley expects sales of up to 40 million copies. For the breadth of the market, both are more sideshow than main event.

What matters is whether yields keep rising. If they do, companies like Berkshire and Siemens Energy, with real cash flow, are better positioned than stories that will not pay out for years.

I hope you enjoy the rest of your weekend.

Best regards,
The StocksToday.com Editorial