Hey Trader,
If the market fell 1,000 points from here, I wouldn’t be surprised one bit. I’d expect it.
You need to understand why before it costs you money.
Interest rates keep climbing. The S&P 500 isn’t blinking.
I call it a game of chicken. Two drivers race toward each other, and the crash comes when neither one swerves.
One driver is the cost of capital. That’s what companies pay for money, and it rises with interest rates.
The other driver is the return on capital. That’s what those companies earn on the money they put to work.
The market can only keep climbing while returns stay above costs. Right now, costs are pushing past them…
Wall Street is betting AI wins this race. Durable goods orders have climbed 17 straight months, and almost all of that growth is AI.
I’ve sat in the portfolio manager’s chair. I know those managers are counting every one of those months.
That number is starting to flatten out.
Let me show you how this race works from the inside. Then I’ll give you the number I’m watching to call the turn.
Why Every Business Lives Or Dies On Two Numbers
Every business runs on one rule. It has to earn more on its money than that money costs.
When output falls below the cost of capital, cash flows out the door. A company that stays there long enough goes bankrupt.
When return on capital beats that cost, you’ve got a winning business model. The whole market runs on the same math.
The cost of capital tracks interest rates. It’s the 10-year Treasury, the 30-year Treasury and the rate on your credit card.
Rates keep ratcheting higher. The bond market is warning you about inflation, creditworthiness and defaults.
That pressure has the cost of capital going parabolic. It’s approaching 6% right now.
Returns are moving the other way. Organic sales growth at the big tech companies has cooled to 3% to 5%.
That’s why the return on capital is flattening out while the cost keeps climbing.
A top trader at Goldman Sachs sees it too. He said equities are stuck in a frustrating cat-and-mouse game with rates.
You need rates to come down to keep stocks climbing. You can’t count on AI to carry them forever.
Why Core Durable Goods Tell You Who’s Winning
Wall Street is betting AI growth will outrun the cost of capital. Managers need proof that bet is working.
Core durable goods orders give them that proof. The orders track big-ticket equipment companies buy to run their business.
AI spending has lifted those orders for 17 straight months.
Every new order tells managers that AI investment is still producing growth. They treat the number as their read on return on capital.
They’ve put their hopes and dreams on it. Value and rates don’t matter to them right now.
They count the months. As long as the number keeps climbing, they keep buying the market.
That durable goods number is lopsided. Almost all of it is AI.
Starbucks isn’t driving it. Dow Chemical, housing and the cyclical building names aren’t driving it either.
AI is the market right now.
If AI growth slows, the return on capital peaks and rolls over. The cost of capital keeps climbing anyway.
That’s when I’d expect the market to fall about 1,000 points.
Why The Rest Of The Market Is Losing The Same Race
AI isn’t the only thing that has to outrun the cost of capital. Every company in the market faces the same race.
Inflation makes that race harder. It raises what companies pay to grow.
Businesses are growing at the fastest pace in over four years. That’s why this market is up.
Inflation is growing even faster. That growth isn’t outrunning the cost of the growth anymore.
Industrials and cyclicals need organic growth of 7% to 8%. They’re running closer to 2% to 3%.
Their earnings are growing about 7% to 8%. Meanwhile, the cost of capital is approaching 6%.
Once the cost of capital takes over, Caterpillar and Deere start to unwind their leverage. Their earnings go from a parabolic run to a waterfall.
Only one group is growing faster than inflation and the cost of capital. You’ll usually find it in semiconductors inside the AI ecosystem.
That’s the same AI trade carrying the durable goods number. Everything outside it is losing the race.
I stepped in to buy some tech last week. It’s paid off huge.
You still have to know what you’re buying.
How You Protect Your Portfolio While This Plays Out
Don’t fall in love with the chart. It won’t tell you which side of this race a company sits on.
I teach ratios and financial statement analysis to graduate students and undergrads. Every stock you own should pass three checks, in this order:
- The valuation has to be one the company can sustain.
- If it can’t, the profitability has to outstrip the cost of capital.
- Core durable goods orders have to keep climbing without flattening and rolling over.
The third check covers the whole market. I’m watching it closely, because those orders are starting to flatten out.
You don’t need to short this market. Just stay a little skeptical.
Charts don’t move because of charts. They move because of value.
That’s why I start every decision with the numbers. The chart comes second.
I built the Genesis COG System around that same order of work. It teaches you to check what a company can sustain before trusting its chart.
I’m more long right now than I’ve been in about two years. Every multiple I own except one sits below nine.
Eventually, the cost of capital will outrun the return. You’ll want to know which of your stocks can survive it.
The Genesis COG System shows you how to find out.
Enroll in the Genesis COG System
Professor Jeffrey Bierman
Creator of the Genesis COG System
