Author: Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients. Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter. Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
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US & ASX Leading Indicators

US Stock Market

The composite valuation indicator (red below) uses the secondary axis on the right.

US Bull/Bear & Market Valuation Indicators

US Bull-Bear

We revised the bull-bear market leading indicator at the end of April 2026 to improve responsiveness by reducing it to a composite of five key indicators. Currently, two of the five indicators signal risk-off, indicating a medium risk of a US bear market.

Bull/Bear Market Indicator

US Treasury Yield Curve

The 10-year/3-month Treasury yield spread has been positive for more than 120 days, and the S&P 500 is above its 12-month weighted moving average, confirming the risk-on signal.

Treasury Yields: 10-Year minus 3-Month

US Fed Funds Rate

The September FOMC meeting raised the fed funds rate target range to 3.75%-4.00%.

Fed Funds Rate Target (Upper Limit)

The Fed Funds Rate signal is risk-on unless there has been a rate cut in the preceding 75 days.

US Cyclical Employment

Cyclical employment increased to 27.625 million in September from 27.597 million in August. A 300,000 decline from the September 2024 peak of 27.671 million would signal risk-off.

Cyclical Employment

US Heavy Truck Sales

US heavy truck sales slowed to 33,900 units in September from 36,500 units in August. The 12-month average eased to 32,900 from 33,000. However, it would need to reverse by 10% for the risk-off signal to reverse to risk-on.

Heavy Truck Sales (Units)

Heavy truck sales reflect the transportation industry's confidence in the economic outlook. A fall of more than 10% below the preceding peak signals risk-off, while a 10% rise above a trough indicates risk-on.

US Stock Pricing

US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then average the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

US Value Buffett

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.

The stock market capitalization-to-GDP ratio is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.

Buffett Indicator: Stock Market Capitalization to GDP

US Value CAPE

Robert Shiller's CAPE smooths out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.

The current advance on the CAPE ratio is the second-highest in history, behind only the 1999 peak during the Dotcom bubble at 44.2, with values far above its long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Ratio

US Value PEmax

The S&P 500 Price-to-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.

S&P 500 PE of Highest Trailing Earnings

US Value Dow FPE

The Forward PE for stocks in the Dow Jones Industrial Average uses a 20% trimmed mean to mitigate the impact of outliers.

Dow Jones Industrials Forward Price-Earnings Ratio

US Value Dow Price-to-Sales

We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.

A change in the Dow Jones index composition on June 29, 2026 may have contributed to the recent jump, when Alphabet Inc. (GOOGL) replaced Verizon (VZ) in the index.

Dow Jones Industrials Price-to-Sales Ratio

Conclusion

The US Bull-Bear indicator, led by the transportation sector, suggests the US economy is slowing but not yet in a bear market, while the composite Stock Pricing indicator continues to warn that stocks are extremely overvalued.

ASX Stock Market

ASX Bull/Bear & Market Valuation Indicators

ASX Bull-Bear

The ASX Bull-Bear Leading Index signals a mild bear market.

ASX Bull/Bear Market Indicator

Australian leading indicators account for 40% of the ASX Leading Index, China for 20%, and the US Leading Index for the remaining 40%.

ASX 200 Financials

The ASX 200 Financials Index (XFJ) is below its 50-week weighted moving average, and a breach of primary support at 9000 would signal risk-off.

ASX 200 Financials Index

ASX 200 Real Returns

The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.

ASX 200/Gold in Australian Dollars

Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.

ASX China OECD

The OECD Composite Leading Indicator for China eased to 97.41 in September. Values below 99.0 or a fall of more than 3 points from the preceding peak, as in 2008, signal risk-off.

China: OECD Composite Leading Indicator

China is Australia's largest export market, and the Chinese economy's performance directly affects the ASX.

ASX Stock Pricing

ASX stock pricing fell to 71.70% from 80.78% five weeks ago. Stock prices are falling, but the decline is not a buy signal.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then average the five readings and convert that average to a percentile. The higher that stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

ASX Value Buffett

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable ratio with a long-term mean of 1.03.

ASX Market Capitalization/GDP

ASX Value Price-to-Sales

The Price-to-Sales ratio for stocks in the ASX 20 uses a 20% trimmed mean to remove the highest and lowest readings, which tend to distort the average.

ASX 20 Price to Sales with 20% Trimmed Mean

ASX Value FPE

The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.

ASX 20 Forward PE with 20% Trimmed Mean

ASX Value PE

The All Ordinaries price-to-earnings (PE) ratio above 20 indicates high pricing. We need to ignore the 2020 distortion caused by low earnings.

ASX Price Earnings Ratio

The PE ratio is based on the latest trailing earnings (red below), but produces extreme readings if earnings per share (EPS) rises or falls sharply, as in 2008 or 2020, which is why we also calculate a PE based on the highest trailing earnings.

ASX Value PEmax

We use a Price-Earnings ratio based on the highest trailing earnings for the All Ordinaries Index to eliminate extreme readings when earnings fall sharply. Values above 16.0 indicate stocks are overpriced, while values below 12 indicate they are cheap.

ASX Price Earnings Ratio of Highest Trailing Earnings

The ASX has volatile earnings due to the large resources sector, which necessitates the use of both price-earnings ratios — based on trailing earnings and highest trailing earnings — to provide a balanced view.

ASX Value DY

The All Ordinaries dividend yield is below its long-term mean of 4.1%, suggesting values are high. A fall below the 3.0% threshold would signal that stocks are extremely overpriced.

ASX Dividend Yield

Note: Lower yields indicate higher values, so we reverse the z-score for the ASX dividend yield.

Conclusion

The ASX Bull-Bear indicator signals the early stages of a bear market, while the falling composite Stock Pricing indicator indicates a drawdown. China’s NBS Manufacturing PMI crossed above 50 and no longer signals contraction, but the ASX 200 Financials Index is still testing primary support at 9000.

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Brent at $104/barrel as S&P 500 Heads for 8000

Key Points

  • Brent rallied to $104 per barrel after testing support at $100 for several days.
  • The S&P 500 is at a new record high.
  • The 10-year Treasury yield held firm at 5.28% after a solid auction.
  • The Dollar Index signals a fresh rally after breaking resistance at 102.
  • Gold is headed for another test of $4,000 per ounce as oil and the Dollar strengthen.

Brent Crude Futures (ICE December'26)

Iran is widening its attacks to restrict the flow of crude through the Strait of Hormuz and exacerbate the shortage of tankers.

At least 12 tankers have been attacked in the Strait of Hormuz since 29 September, including multiple Very Large Crude Carriers (VLCCs). VLCC rates have hit around $1.3 million a day, up from $100K (13x) in 8 months.

Following the heightened attacks on tankers transiting the Oman Lane in the past few days, Iran has now attacked two stationary tankers: one near Qatar and one near the Fujairah ship-to-ship hub. (HFI Research)

Stocks

The S&P 500 recorded a new high, heading for a test of 8000.

S&P 500

Mega-cap technology stocks lead the way, with the Roundhill Magnificent 7 ETF (MAGS)1 breaking resistance at 70.

Roundhill Magnificent 7 ETF (MAGS)

Treasury Market

10-year Treasury yields eased slightly from 5.31% to 5.28%.

10-Year Treasury Yield

From Peter Boockvar:

The 10 yr note auction, with yields hovering around 24 year highs, was solid. The yield of 5.30% was almost 2 bps below the when issued pricing. The bid to cover of 2.77 was well above the one year average of 2.51 and that matches the highest since late 2014. Also, direct and indirect buyers took down 97.5% of the auction which is the most I’ve seen.

Bottom line, for whatever reason, likely the 24 yr highs in rates, brought out the buyers and resulted in a great auction. In response, the 10 yr yield has backed off to 5.27% from 5.31% just prior to the results….

The MOVE Bond Market Volatility Index retreated, easing liquidity concerns in financial markets.

MOVE Bond Market Volatility Index

Dollar & Gold

The Dollar Index strengthened above 102, warning of another advance.

Dollar Index

Gold weakened as oil and the Dollar strengthened, signaling another test of primary support at $4,000 per ounce.

Spot Gold

Energy metals are also being sold, with Sprott Uranium Miners ETF1 (URNM) breaking support at 50.

Sprott Uranium Miners ETF (URNM)

Sprott Lithium Miners ETF1 (LITP) broke support at 10.

Sprott Lithium Miners ETF (LITP)

Sprott Critical Materials ETF1 (SETM) is testing support at 28.

Sprott Critical Materials ETF (SETM)

Iron ore is also weak, testing support at $90 per tonne.

Iron Ore

However, Copper continues in a strong uptrend, heading for another test of resistance at $15,000 per tonne.

Copper

Conclusion

Volatility in crude oil and Treasury markets will likely be crazy over the next three weeks before the November 3 midterms.

Stocks are running on massive liquidity in financial markets. Even another rate hike would be unlikely to deter them — though that is unlikely.

We expect Gold to test support at $4,000 as oil and the Dollar strengthen. But these are short-term moves, and we remain long-term Gold bulls.

The risks are too high for us to venture back into long-term Treasuries, and we remain heavily weighted in cash and short-term financial assets which in our view offer a better risk-reward ratio.

Acknowledgments

Notes

  1. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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Zurich Insurance Group AG (ZURN) – Update

Zurich Insurance Group AG (ZURN) announced it had completed its acquisition of Beazley plc on October 2, 2026.

The $10.9 billion acquisition expands Zurich’s UK base, propelling it to a leading position in the UK Commercial segment and accelerating the group toward its goal of becoming a global leader in Specialty insurance.

The combined Specialty division, with expected $15 billion in GWP, will be headquartered in London. Specialty has limited competition and enjoys higher margins than run-of-the-mill Property & Casualty (P&C). Zurich already has a formidable presence in Construction & Engineering, Energy, and Captives, writing $9 billion in annual gross written premiums (GWP). This is complemented by Beazley’s strengths in Cyber, Marine, E&S (excess and surplus lines), Political Risk, Fine Art & Specie (valuables), and Financial lines.

The Beazley acquisition also propels the group to a leading position in Lloyd’s syndicates:

“Joining Lloyd’s of London for the first time is an important step, giving us access to a unique platform for capital, product and service innovation, specialist underwriting and global reach.” ~ Zurich CEO Mario Greco

Zurich expects the acquisition to deliver $150 million in annual cost savings, $1 billion in capital savings, and incremental revenue growth opportunities of more than USD 1 billion per year.

The acquisition is funded by $3.0 billion in cash, $2.9 billion in debt, and $5 billion in new equity.

Financial targets for the 2025–2027 period are unchanged: Core EPS compound annual growth of >9%, Core RoE of >23%, and cash remittances of >USD 19 billion (subject to an SST floor of 160%).

Zurich Insurance Group AG (ZURN) Targets

Zurich’s Swiss Solvency Test (SST) ratio reflects its strong capital position, estimated at 266% in Q2 2026, up from 259% at December 31, 2025. The acquisition is expected to lower the SST ratio to a still-strong 236% in Q3. The group is also expected to maintain its Aa rating from Moody’s despite a 3% increase in its leverage ratio.

Moody's Leverage Ratio

Investments

Zurich’s half-year financial report reflects total investments of $177 billion at market value. Equity exposure is 6.0%, hedge funds and private equity are 3.0%, while credit and private debt are 44% ($78 billion) of total investments.

Zurich Insurance Group AG (ZURN) Investments

Stress tests estimate that a 20% fall in equities would have less impact than a 50-basis-point drop in interest rates, but we consider the 3% exposure to hedge funds and private equity as higher risk.

Zurich Insurance Group AG (ZURN) SST Stress Test

Most of the $78 billion in credit and private debt is investment grade, except for 15% of Non-Financial Credit, 1% of Financial Credit, and 40% of Private Debt.

Zurich Insurance Group AG (ZURN) Credit Exposure

Non-Financial Credit

Of the Non-Financial Credit, only 6% ($1.6 billion) is lending to Technology companies.

Zurich Insurance Group AG (ZURN) Non-Financial Credit

Private Debt

Private Debt exposure of $10.1 billion is further broken down by sector and debt performance. Infrastructure and Real Estate loans have experienced no defaults. Senior Corporate Lending is mostly non-investment-grade, but its loss experience is better than that of low investment-grade (Ba) securities. Private placements are 97% investment-grade but have a slightly higher loss rate.

Middle market loans are a potential vulnerability, with only 5% investment-grade, though the group says that over 80% of the $1.3 billion exposure is to European borrowers, and software exposure is low.

Zurich Insurance Group AG (ZURN) Private Debt Exposure

Middle market loans, with only 5% investment-grade, are a potential vulnerability. However, over 80% of the $1.3 billion exposure is to European borrowers, and software exposure is low. The $1.6 billion investment in CLOs is AAA investment grade, with losses triggered only if underlying defaults exceed 40%.

Most importantly, the group has immaterial exposure to business development companies (BDCs) and pooled investments in commingled funds. These categories have experienced higher default rates in the past 12 months.

Zurich Insurance Group AG (ZURN) Private Debt Exposure

Chart

The monthly chart below (in Swiss Francs) shows a lengthy consolidation below CHF 600 since early 2025. A breakout that later respects the new support level at CHF 600 would offer a long-term target of CHF 750.

Zurich Insurance Group AG (ZURN) in CHF

Conclusion

We consider Zurich Insurance Group AG to be a well-run company with low investment risk. The Beazley acquisition will likely take time to settle. However,  the group has an exemplary acquisition record, and the combination strengthens its long-term positioning as the leader in specialty insurance.

We maintain our BUY rating for Zurich Insurance Group AG, which trades under the symbol ZURN on the Swiss SIX exchange. The stock also trades under the American Depositary Receipt (“ADR”) program, with the symbol ZURVY, at a ratio of 20 American Depositary Shares (“ADSs”) to 1 ordinary share.

Acknowledgements

Morningstar: Zurich Is a Rare Structurally Advantaged Multiline Insurer With a Narrow Moat (PDF)

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Australia’s biggest recession risk isn’t interest rates | Macrobusiness

By: Leith van Onselen | MacroBusiness | 28 September 2026
Re-published with permission.

The interest rate futures market overwhelmingly expects the Reserve Bank of Australia (RBA) to lift the official cash rate by 0.25% on Tuesday.

The futures market has also priced in a high probability of two further rate hikes over the next six months, which would take the cash rate to 5.10%.

Given that mortgage payments are already taking a near-record share of household income, the prospect of two to three rate hikes has economists warning that the economy could be pushed into a technical recession next year.

While the prospect of rate hikes is indeed worrying, it is not the greatest threat to the Australian economy: fuel shortages, particularly diesel, are.

As illustrated below by Alex Joiner from IFM Investors, Australia is easily the largest importer of diesel fuel in the world:

Global diesel imports

“Australia is uniquely exposed to this diesel price shock given our reliance on imported product, which is by far the highest in the world, not as a % of GDP or per capita but outright”, Joiner wrote on X (Twitter).

“This comes as other countries have scaled back imports and Australia’s have accelerated due in part to refinery closures”.

To add further insult to injury, Sky UK posted the following chart showing that Australia has very low stocks of diesel in reserve:

Diesel stocks in reserve



Source: Sky UK

Thus, with the two straits in the Middle East effectively shut and oil flows ceasing, Australia is the most exposed economy on earth to diesel shortages.

The following chart from CBA shows what a 10% reduction in diesel supply would mean to key sectors of the Australian economy – namely mining, construction, transport, and agriculture:

Diesel fuel shortages

The economic impact would be enormous, effectively shutting down large swathes of the economy. Unemployment would also rise materially.

Even if shortages are avoided, the economy faces severe energy cost inflation, resulting in significant cost-push inflation as firms pass on higher costs.

Diesel Price Forecasts



Diesel Price Forecasts (Source: Global Energy Flow)

As a result, overall CPI inflation would rise, increasing pressure on the RBA to hike further.

Higher interest rates alongside rising unemployment would exacerbate the housing downturn, impacting consumption (via the wealth effect) and industries reliant on turnover (e.g., state budgets via stamp duty, real estate agents, mortgage brokers, banks, and retailers).

Indeed, HSBC has forecast a 13% peak-to-trough decline in capital city home values, alongside a 1% reduction in GDP growth, due to slower consumer spending and reduced housing turnover.

Thus, rising fuel prices and/or shortages, higher interest rates, and an accelerating housing downturn have left Australia’s economy facing a technical recession in 2027, alongside a deep per capita recession.

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RBA Hikes, ASX 200 Rallies

Key Points

  • The RBA hiked its cash rate target by 25 basis points to 4.6% today.
  • Monthly CPI jumped to 4.0% in August, up from 3.5% in July.
  • A further rate hike is expected at the next RBA meeting.
  • The ASX 200 rallied to test resistance at 8800.

The RBA has grown more hawkish since its last meeting, spurred by a sharp rise in diesel and petrol prices that threaten to feed through into higher prices.

RBA Cash Rate Target

The average diesel retail price increased to 286.7 cents last week, with the wholesale price rising to 273.5 cents per liter.

Australian Diesel Price

CPI jumped to 4.0% in August from 3.5% in July, while the trimmed mean held steady at 3.6%.

Australian CPI & Trimmed Mean CPI

Tradables inflation (2.9%), reflecting prices for imported goods, rose sharply on higher fuel prices. Non-tradables (4.5%) reflect strong domestic inflation for services such as rent and education.

Australian CPI: Tradables & Non-Tradables

Annual inflation of 5.7 per cent for Housing reflected rising costs for both New dwellings and Electricity. New dwelling prices rose 5.4 per cent in the 12 months to August as builders passed on higher costs for materials and labour.

Transport was the second largest contributor to annual inflation in August, rising by 5.6 per cent due to higher automotive fuel prices.

On a monthly basis, Automotive fuel prices rose 14.8 per cent in August, compared to a rise of 7.5 per cent in July. This was driven by higher world oil prices and the unwinding of the remainder of the federal governments fuel excise relief measures in August. (ABS)

Nominal GDP slowed slightly to 5.3% for the June quarter.

Australian Nominal GDP Growth

Australian bond yields, at 4.95% for the 2-year and 5.25% for the 10-year, closely shadow nominal GDP growth, indicating the RBA is maintaining neutral monetary policy.

Australian Government Bond Yields

However, private credit is still growing at an annual rate of 8.4%, well above NGDP growth, suggesting that further tightening is necessary.

Australia: Credit and Broad Money Growth

Westpac Chief Economist Luci Ellis says “the bar for a November rate hike is very low” and she now expects a further hike to 4.85%.

The ASX 200 shrugged off the rate hike, rallying to test resistance at 8800.

ASX 200 Index

Conclusion

The cure for high prices is high prices. Credit growth will likely fall if the 2-year AGB yield rises above nominal GDP growth.

Diesel shortages in the coming months could do far more damage than a rate hike.

Acknowledgments

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US & ASX Leading Indicators

US Stock Market

The composite valuation indicator uses the secondary axis on the right.

US Bull/Bear & Market Valuation Indicators

US Bull-Bear

We revised the bull-bear market leading indicator at the end of April 2026 to improve responsiveness by reducing it to a composite of five key indicators. Currently, two of the five indicators signal risk-off, indicating a medium risk of a US bear market.

Bull/Bear Market Indicator

US Treasury Yield Curve

The 10-year/3-month Treasury yield spread has been positive for more than 120 days, and the S&P 500 is above its 12-month weighted moving average, confirming the risk-on signal.

Treasury Yields: 10-Year minus 3-Month

US Fed Funds Rate

The September FOMC meeting raised the fed funds rate target range to 3.75%-4.00%.

Fed Funds Rate Target (Upper Limit)

The Fed Funds Rate signal is risk-on unless there has been a rate cut in the preceding 75 days.

US Stock Pricing

US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then average the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

US Value Buffett

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.

The stock market capitalization-to-GDP ratio is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.

Buffett Indicator: Stock Market Capitalization to GDP

US Value CAPE

Robert Shiller's CAPE smooths out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.

The current advance on the CAPE ratio is the second-highest in history, behind only the 1999 peak during the Dotcom bubble at 44.2, with values far above its long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Ratio

US Value PEmax

The S&P 500 Price-to-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.

S&P 500 PE of Highest Trailing Earnings

US Value Dow FPE

The Forward PE for stocks in the Dow Jones Industrial Average uses a 20% trimmed mean to mitigate the impact of outliers.

Dow Jones Industrials Forward Price-Earnings Ratio

US Value Dow Price-to-Sales

We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.

A change in the Dow Jones index composition on June 29, 2026 may have contributed to the recent jump, when Alphabet Inc. (GOOGL) replaced Verizon (VZ) in the index.

Dow Jones Industrials Price-to-Sales Ratio

Conclusion

The US Bull-Bear indicator, led by the transportation sector, indicates that the US economy is slowing but is not yet in a bear market, while the composite Stock Pricing indicator continues to warn that stocks are extremely over-priced.

ASX Stock Market

ASX Bull/Bear & Market Valuation Indicators

ASX Bull-Bear

The ASX Bull-Bear Leading Index signals a mild bear market.

ASX Bull/Bear Market Indicator

Australian leading indicators account for 40% of the ASX Leading Index, China for 20%, and the US Leading Index for the remaining 40%.

ASX 200 Financials

The ASX 200 Financials Index (XFJ) is below its 50-week weighted moving average, and a breach of primary support at 9000 would signal risk-off.

ASX 200 Financials Index

ASX 200 Real Returns

The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.

ASX 200/Gold in Australian Dollars

Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.

ASX Stock Pricing

ASX stock pricing fell to 71.70% from 80.78% five weeks ago. Stock prices are falling, but the decline is not a buy signal.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then average the five readings and convert that average to a percentile. The higher that stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

ASX Value Buffett

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable ratio with a long-term mean of 1.03.

ASX Market Capitalization/GDP

ASX Value Price-to-Sales

The Price-to-Sales ratio for stocks in the ASX 20 uses a 20% trimmed mean to remove the highest and lowest readings, which tend to distort the average.

ASX 20 Price to Sales with 20% Trimmed Mean

ASX Value FPE

The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.

ASX 20 Forward PE with 20% Trimmed Mean

Conclusion

The ASX Bull-Bear indicator signals the early stages of a bear market, while the falling composite Stock Pricing indicator warns of a drawdown. ASX 200 Financials and Chinese manufacturing are on bear watch, with the ASX 200 Financials Index testing primary support at 9000 and China’s NBS Manufacturing PMI below 50 since July, signaling a contraction.

Related Links

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Something Has to Break

Key Points

  • The S&P Global US Composite flash PMI shot up to 58.4% for September.
  • 10-year Treasury yields jumped to 5.114%.
  • We expect 10-year yields to climb higher, causing a correction in stocks.
  • The S&P 500 retreated, heading for a test of support between 7500 and 7600.

The S&P Global US Composite flash PMI shot up to 58.4%, the fourth consecutive month of accelerating growth and the strongest expansion in private-sector activity since July 2021.

S&P Global Composite PMI

The move was echoed by a healthy rise in the European Union’s equivalent flash PMI to 53.1%.

S&P Global Composite PMI

The surge in economic activity boosted market expectations of further Fed rate hikes, with the 2-year Treasury yield jumping to 4.876% compared to the current Fed funds target range of 3.75% – 4.00%.

2-Year Treasury Yield

The 10-year yield broke through resistance at 5.0%, closing at 5.114%, the highest level in more than 20 years. We expect a retracement to test the new support level, but respect will likely confirm another advance. Our medium-term target is 6.0%.

10-Year Treasury Yield

The S&P 500 retreated to 7700 and is headed for a test of support between 7500 and 7600. A breach would signal a correction to test primary support at 7300.

S&P 500

The Outlook for Treasuries

The spread between the 10-year and 2-year Treasury yields is shrinking as in previous Fed rate-hiking cycles (red arrows below). A dip below zero typically precedes a recession. The dip below zero from 2022-2024 was an exception, caused by the unprecedented scale of fiscal and monetary stimulus during the pandemic.

10-Year Treasury Yield minus 2-Year Yield

The Atlanta Fed’s GDPNow model projects real GDP growth of 5.1% in the third quarter, a 3.6% increase from Q2.

Atlanta Fed GDPNow

Even without an increase in the GDP deflator, driven by rising energy prices, we expect nominal GDP to jump from an annual rate of 6.6% in Q2 to more than 10.0% in Q3.

10-Year Treasury Yield & Nominal GDP Growth

The strong divergence between nominal GDP and the 10-year Treasury yield would provide further stimulus to an already overheating economy, causing a sharp increase in inflation.

Conclusion

The Fed is trapped in an inflationary boom that will likely drive long-term yields much higher than 5.0%. Rising interest rates will increase the interest cost on the US Treasury’s $40 trillion debt, expanding the budget deficit above $2.0 trillion.

The Fed is constrained by its swollen balance sheet and will likely resist further QE to suppress long-term interest rates and assist the US Treasury.

Surging economic activity, compounded by crude oil and diesel supply shortages, is also expected to drive a sharp increase in inflation, adding to the Fed’s challenges.

Something has to break, and we are adopting a highly defensive posture, heavily overweight in Gold, short-term financial instruments, and defensive stocks with strong pricing power and stable income streams.

Acknowledgments

Posted on

US & ASX Leading Indicators

US Stock Market

The composite valuation indicator uses the secondary axis on the right.

US Bull/Bear & Market Valuation Indicators

US Bull-Bear

We revised the bull-bear market leading indicator at the end of April 2026 to improve responsiveness by reducing it to a composite of five key indicators. Currently, two of the five indicators signal risk-off, indicating a medium risk of a US bear market.

Bull/Bear Market Indicator

US Treasury Yield Curve

The 10-year/3-month Treasury yield spread has been positive for more than 120 days, and the S&P 500 is above its 12-month weighted moving average, confirming the risk-on signal.

Treasury Yields: 10-Year minus 3-Month

US Fed Funds Rate

The September FOMC meeting raised the fed funds rate target range to 3.75%-4.00%.

Fed Funds Rate Target (Upper Limit)

The Fed Funds Rate signal is risk-on unless there has been a rate cut in the preceding 75 days.

US Stock Pricing

US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then average the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

US Value Buffett

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.

The stock market capitalization-to-GDP ratio is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.

Buffett Indicator: Stock Market Capitalization to GDP

US Value CAPE

Robert Shiller's CAPE smooths out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.

The current advance on the CAPE ratio is the second-highest in history, behind only the 1999 peak during the Dotcom bubble at 44.2, with values far above its long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Ratio

US Value PEmax

The S&P 500 Price-to-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.

S&P 500 PE of Highest Trailing Earnings

US Value Dow FPE

The Forward PE for stocks in the Dow Jones Industrial Average uses a 20% trimmed mean to mitigate the impact of outliers.

Dow Jones Industrials Forward Price-Earnings Ratio

US Value Dow Price-to-Sales

We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.

A change in the Dow Jones index composition on June 29, 2026 may have contributed to the recent jump, when Alphabet Inc. (GOOGL) replaced Verizon (VZ) in the index.

Dow Jones Industrials Price-to-Sales Ratio

Conclusion

The US Bull-Bear indicator, led by the transportation sector, indicates that the US economy is slowing but is not yet in a bear market, while the composite Stock Pricing indicator continues to warn that stocks are extremely over-priced.

ASX Stock Market

ASX Bull/Bear & Market Valuation Indicators

ASX Bull-Bear

The ASX Bull-Bear Leading Index signals a mild bear market.

ASX Bull/Bear Market Indicator

Australian leading indicators account for 40% of the ASX Leading Index, China for 20%, and the US Leading Index for the remaining 40%.

ASX 200 Financials

The ASX 200 Financials Index (XFJ) is below its 50-week weighted moving average, and a breach of primary support at 9000 would signal risk-off.

ASX 200 Financials Index

ASX 200 Real Returns

The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.

ASX 200/Gold in Australian Dollars

Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.

ASX Stock Pricing

ASX stock pricing fell to 71.70% from 80.78% five weeks ago. Stock prices are falling, but the decline is not a buy signal.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then average the five readings and convert that average to a percentile. The higher that stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

ASX Value Buffett

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable ratio with a long-term mean of 1.03.

ASX Market Capitalization/GDP

ASX Value Price-to-Sales

The Price-to-Sales ratio for stocks in the ASX 20 uses a 20% trimmed mean to remove the highest and lowest readings, which tend to distort the average.

ASX 20 Price to Sales with 20% Trimmed Mean

ASX Value FPE

The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.

ASX 20 Forward PE with 20% Trimmed Mean

Conclusion

The ASX Bull-Bear indicator signals the early stages of a bear market, while the falling composite Stock Pricing indicator warns of a drawdown. ASX 200 Financials and Chinese manufacturing are on bear watch, with the ASX 200 Financials Index testing primary support at 9000 and China’s NBS Manufacturing PMI below 50 since July, signaling a contraction.

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Warsh Hikes While Trump Fumes

Key Points

  • The FOMC voted unanimously to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.
  • President Trump criticized the FOMC decision, demanding that the Fed slash interest rates to “1% or less” on Truth Social.
  • Backing a rate hike was a politically brave move by the new Fed Chair, Kevin Warsh, as it will likely sour his relationship with the President.
  • The Fed hike likely avoided a sharp spike in long-term Treasury yields as the bond market was growing restless over loose monetary and fiscal policy.

Fed Chair Kevin Warsh cemented his reputation as an inflation hawk, voting in support of a unanimous FOMC decision to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.

President Trump condemned the move, demanding on Truth Social that the Fed slash interest rates to “1% or less.”

“We are ‘carrying’ almost every country in the World, and that cannot go on any longer,” Trump wrote in a Truth Social post.

“LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” he wrote. (CNBC)

Updated dot plot projections show a strong majority of Fed officials expect another rate hike this year. Warsh did not submit a projection, but 16 of 18 participants expected at least one more rate hike in 2026, of which 4 projected 2 hikes.

FOMC Dot Plot

The 2-year Treasury yield climbed to 4.73%, pricing in 3 further rate hikes.

2-Year Treasury Yield (CNBC)

10-year Treasury yields held firm at 5.0%.

10-Year Treasury Yield

A failure of the Fed to act would likely have caused a bond sell-off, with the 10-year yield spiking upwards, reflecting bond market disappointment with perceived lax monetary and fiscal policy.

Long-term yields will likely still rise, but at a more measured pace than if the Fed’s commitment to stable prices were in doubt.

The Fed Chair gave three factors that are driving long-term yields higher:

  1. The economy is strengthening and at close to full employment;
  2. Increased competition for capital as AI hyperscalers seek to fund capital spending; and
  3. Geopolitical instability.

He did not mention lax fiscal policy, with $40 trillion of federal debt and annual deficits approaching $2 trillion a year, which we consider a fourth factor driving higher yields.

Conclusion

We may have misread the new Fed Chair as a “political animal.” He has delivered on his commitment to fight inflation despite opposition from President Trump. In doing so, he has likely placated the bond market, which was driving long-term yields higher. We still expect long-term rates to rise, but at a more measured pace.

“The era of free money is definitely over,” Kim Crawford, fixed-income portfolio manager at JPMorgan Asset Management, told the Financial Times today. “The bond market is looking for discipline.”

We expect further rate hikes if the economy continues to grow faster than existing capacity allows, fueling increased inflationary pressure.

Credit growth above 4.0% is not consistent with low inflation. A 4.0% target would be consistent with the 2.3% projected real GDP growth and 1.7% inflation (below the Fed’s 2.0% target).

Bank Credit Growth

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