October 9, 2026

In the Loop – October 9, 2026

“In The Loop” is designed to give you a short update reflecting major developments, earnings, and investment trends across some core Equity Income and Growth holdings. All clients should be aware that individual buy/sell recommendations will be conveyed directly to you on an individual basis. Have a great weekend.

The U.S. economy continues to show remarkable resilience despite high interest rates and elevated diesel and energy costs. Real GDP grew at a 2.2% annualized rate in the second quarter, while current estimates point to an acceleration in the third quarter. The labor market remains healthy by historical standards, with unemployment around 4.2%, although hiring has begun to moderate. Manufacturing has emerged as an important bright spot, with the ISM Manufacturing Index firmly in expansion territory, while underlying inflation pressures are showing signs of cooling. But perhaps the most important force supporting the economy is the extraordinary buildout of AI infrastructure. The Wall Street Journal has compared the scale of today’s AI investment boom with America’s great infrastructure expansions: including railroads, canals and the electric grid. This highlights just how large the current capital-spending cycle has become. Hundreds of billions of dollars are flowing into data centers, power generation, electrical equipment, semiconductors, networking, cooling and construction. Sorry, I have to say it, Speed 1. Put it all together and the picture is of an economy growing at a healthy pace, with historically low unemployment, expanding manufacturing and moderating inflation despite restrictive interest rates and elevated energy costs. The AI infrastructure boom adds another powerful source of investment demand, helping explain why the economy has remained stronger than many expected. Rather than signaling an imminent recession, the current data looks more consistent with a resilient expansion increasingly powered by the physical buildout of America’s next generation of infrastructure.

The Rate Problem

The rate problem may ultimately be telling us something important about the strength of the economy itself. Over time, nominal interest rates tend to have a relationship with nominal economic growth because bond investors need to be compensated for both inflation and a real return on their capital. Today, the Atlanta Fed is estimating third-quarter real GDP growth at approximately 3.7%, while inflation remains around 3%, implying an economy potentially expanding at roughly a 6%–7% nominal pace. Against that backdrop, a 10-year Treasury yield around 5.3% does not look completely disconnected from economic fundamentals. In fact, part of the rise in rates may simply reflect an economy that remains stronger than expected. But there is another important ingredient: energy. Diesel is effectively an industrial input into almost everything, including trucking, construction, agriculture, mining, manufacturing and the movement of goods. U.S. diesel prices recently exceeded $6 per gallon as global distillate supplies tightened. Higher diesel costs can work their way through transportation and production costs, keeping inflation expectations and interest rates higher than they otherwise would be. This does not mean diesel alone determines Treasury yields, but it may currently be an important pressure point. If diesel and broader energy prices decline while economic growth remains strong, the combination could become extremely favorable: lower input costs could reduce inflation, give the Federal Reserve more flexibility, pull long-term rates lower and simultaneously improve household purchasing power and corporate margins. In that scenario, the economy could effectively receive a second wind with strong real growth combined with falling inflation and falling interest rates. This could be a particularly powerful environment for housing, manufacturing, infrastructure, small and mid-cap companies and other rate-sensitive areas of the market.

Rates and The Banking System

This is where could the “Spooky” part of October may emerge. Over the past month, one of the biggest changes in the economic landscape has been the sharp rise in long-term interest rates. The 10-year Treasury has climbed toward 5.3% and the 30-year toward 5.7%, putting long-term yields at levels not seen since 2002. That matters because these rates ultimately filter into mortgages, auto loans, corporate borrowing and other forms of credit, raising the cost of capital for households and businesses. Banks will provide an important test when they begin reporting third-quarter results later this month. The banking system remains well capitalized and profitable, but rapidly rising rates reduce the market value of the Treasury and mortgage securities sitting on bank balance sheets. At the end of 2025, the Federal Reserve estimated that bank available-for-sale and held-to-maturity securities were already roughly $300 billion below book value, and the latest increase in yields will likely push those unrealized losses higher. If a meaningful portion of the banking system, say 20% of banks, were forced to recognize significant capital impairment, the concern would not simply be lower bank earnings. Banks facing pressure on capital would likely become more conservative lenders, tighten underwriting standards, reduce loan growth and preserve liquidity. That could transmit the bond-market selloff directly into the real economy through tighter credit for consumers, small businesses, commercial real estate and construction. The market impact would likely begin with regional banks and other rate-sensitive financials but could spread to housing, consumer discretionary stocks and highly leveraged companies. The important distinction is that unrealized securities losses alone do not necessarily create a banking crisis; the greater economic risk emerges if those losses begin constraining capital and causing banks to meaningfully restrict credit.

Today, we attempt to balance our update. There are many data points to be excited about, but there are also structural issues that we need to pay attention to. We remain bullish and opportunistic, yet willing to adjust if the facts change.

We remain focused on navigating market trends and positioning portfolios for long-term growth and resilience.
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Formidable Asset Management (“Massey Romans Capital”) is an investment adviser registered under the Investment Advisers Act of 1940. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. Although taken from reliable sources, the Firm cannot guarantee the accuracy of the information received from third parties.

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