Episode summary
The Rally is Broadening. The Earnings Growth Isn't. Liz Ann Sonders on Which Breaks First
Excess Returns
· · 1 hr 2 min · Guests: Liz Ann Sonders
Summary
Liz Ann Sonders argues that the post-pandemic economy no longer behaves like a clean, linear cycle. Instead, it is moving through sector-level recessions and expansions at different times, which helps explain the market’s rapid rotations, the broadening beyond the biggest tech winners, and the renewed sensitivity of stocks and bonds to inflation rather than growth.
She says the current backdrop is best described as “unstable” rather than merely uncertain. In her view, the return of more volatile inflation, more geopolitical risk, and a more temperamental stock-bond relationship makes simple 60/40 style thinking less reliable, while volatility-based rebalancing and broader diversification matter more. She also argues that the AI trade is not dead, but it has spread down the cap spectrum and into industrials, materials, and other beneficiaries, reducing the dominance of the Mag 7.
On the macro side, Sonders says tighter immigration is worsening labor supply at a time when the U.S. already faces bad demographics, while the deficit and debt problem can only be solved with entitlement reform. She thinks the 30-year Treasury yield is being driven by fundamentals, not jawboning, and that AI capex is boosting imports and corporate earnings concentration more than headline GDP. She also warns that household stock exposure has become a real economic risk because a severe equity downturn could spill into the broader economy.
Key takeaways
- Sonders says the economy is cycling through sector-specific recessions and expansions, not a normal linear expansion-recession pattern.
- She thinks the stock-bond regime has likely shifted back to negative correlation, making diversification and rebalancing more important than calendar-based rules.
- Sonders argues the broadening trade is real: equal-weight, small caps, and international stocks are doing better than the narrow Mag 7 leadership.
- She says reduced immigration worsens labor supply and makes payroll math and demographic comparisons meaningfully less useful than before.
- Sonders believes the 30-year yield reflects deficits, term premium, and financing competition, not something Treasury can jawbone away.
- She warns that equity ownership is now so widespread that a sharp market drawdown could become an economic headwind through the wealth effect.
Notable quotes
“we can't think of this cycle in linear terms”
“I think unstable is the better unword to describe the current backdrop than the simple more simple word of uncertain”
“volatility based rebalancing is what gives you an edge in this environment”
“rotation is the new momentum trade”
“the only way to start solving this problem is to make some sort of adjustments to entitlements”
How the episode opens
You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I'm Matt Ziggler. Justin Carbono is with me in the co-host seat.
And our guest today, I mean, are tech stocks the boys of summer? Are stock and bond correlations singing summerloving only to break up when it's back to school season? Are we ever ever on this journey going to stop believing?
Only one person can answer that. in that one version is Lzanne Saunders. Lizanne, welcome back to Access Returns.
Hi guys, it's so nice to be here. But next time you got to you got to get a Led Zeppelin song in the tease. That will take my request. All right. — Will the bond levy break or the — I've got you. The market's confused a lot of investors in the recent past year with stocks near record highs. You got the 30, you're uh at multi decade highs. inflation stuck above 3% depending who you ask. We're somewhere in that range. How do you think investors should possibly make sense of where we are August 20th, 2026?
Well, I I think you know starting with where we are in the economic cycle, we we can't think of this cycle in linear terms. uh not that there's really a true normal cycle, but typically you you come out of a recession, you go through the recovery phase and you have an expansion phase and then a slowdown phase and then the recession. And certainly when there's a credit crunch involved or a financial system collapse like in the case of the global financial crisis, um it it tends to happen in that linear fashion and in the aggregate.
Anything but that has been the case in the post-pandemic era all the way back from during the pandemic where the good side of the economy boomed along with the stimulus given services were shut down.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- market breadth
- ai capital spending
- treasury yields and deficits
- immigration and labor supply
- earnings concentration
Companies and tickers mentioned
- SCHW
- Charles Schwab
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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