Fed policy, yen intervention, and why bond yields keep rising

JACK JANASIEWICZ: I'm Jack Janasiewicz. 

BRIAN HESS: I'm Brian Hess. 

JACK JANASIEWICZ: And this is Tactical Take. 

BRIAN HESS: Hi there, Jack, how are you doing? 

JACK JANASIEWICZ: Back in the seat again here. 

BRIAN HESS: Back in the seat again. I thought this month, maybe we could start by talking about the Fed. One thing that's been getting a lot of attention recently has been the new communications strategy under Chairman Kevin Warsh. So we've got the statements very much streamlined, forward guidance more or less done away with. And it seems like the Fed kind of wants the bond market to price its feelings on where rates should be with as little influence or interference from the Fed as possible, which is a marked change from the prior couple of decades. So I'm curious, do you agree with that assessment, and if so, what do you think are the ramifications of this kind of a shift? 

JACK JANASIEWICZ: It gets tricky because I think we've become accustomed to forward guidance and trying to really discern what the Fed is trying to tell us going forward, so we can start to price that in over the course of time. Whereas if you don't have that forward guidance, you're going to be guessing. I think if the Fed were to go this route and stay with that route, I think they need to be a little bit more clear in terms of their framework and how they think about policy setting going forward. 

So that might help to clear things up, a clear outline of metrics they're paying attention to, things that they're looking at, and follow that sort of a checklist. And that would, I think, help, I think, investors really get a sense as to how the Fed's thinking about things. They can adjust their thought process and their review of these metrics as well going forward, and I think get a little bit more in sync. But the flip side to all of this is you're subject to probably a little bit more of an increased volatility on the backdrop. And bond market volatility is never a good thing going forward. So we'll see how that starts to play itself out. 

BRIAN HESS: Maybe some of the task forces that are being put together will clarify, maybe, the framework issues that you're highlighting. Is that possible? 

JACK JANASIEWICZ: Yeah, and I think there's some merit to that. It'll be interesting to hear what comes out because I think we've seen some commentary from-- I think it's Mervyn King, who was over at the Bank of England, and he was really a big proponent of really laying out the framework. And I think he's written a couple of white papers about laying out that framework. And so, again, if he's the one who's going to be in charge of Fed communications or at least in charge of that with regard to the task force, maybe that starts to emerge there. So it remains to be seen, but that could be a step in the right direction, so to speak. 

BRIAN HESS: And according to Chairman Warsh, a lot of that should be wrapped up by the end of the year, which is hard to believe. But I mean, that's only four or so months from now.

JACK JANASIEWICZ: Yeah, and there's quite a few task force out there.

BRIAN HESS: A lot task force, a few holidays between now and then. Yeah, so we'll see. 

JACK JANASIEWICZ: And there's also-- I think another risk to think about in here is that if Warsh is not going to be out and speaking and giving that forward guidance, someone's going to replace that. You still have Fed speakers going out and doing their thing. And so the market probably starts to pivot towards those other Fed speakers coming out rather than Warsh. And there's a risk that you start to have significantly divergent views. Who do you put more weight on? Who do you not put weight on? And so that, I think, could maybe muck up the waters a little bit more as well. 

BRIAN HESS: Yeah, we'll see if they'll be able to operate under a pure no forward guidance process without other members at the table chiming in and diluting that. It would be interesting. I think it's kind of-- it'll be a fun experiment to allow market forces and the wisdom of crowds to dictate the policy rate. Because it's almost like now, if you were to say to me, well, do I think the Fed's going to hike this year or not, I would look at the market, and I would say, well, the Fed's-- or sorry, the market's pricing that they will. So I think they'll do it. Do I think they'll hike in September? I don't know because the market's saying it's like a one third chance. 

JACK JANASIEWICZ: Yeah. And it's interesting, too, because if you think about what matters most for markets, it's a shift where expectations are in one place, but those expectations aren't met right. And so to your point, if you're looking at what the market's pricing in, the market had been saying, hey, we expect two to three hikes. And we've talked about this in previous podcasts where we haven't been in alignment with that. We were a little bit more dovish than that. And now the market's slowly gravitating back to that. But that's what's going to change prices in the marketplace is that normalization of actuals versus expectations. And that's key. 

BRIAN HESS: Yeah, for sure. Now we did get some inflation data last week, both the CPI and PPI reports. And they were pretty much in line with expectations, but that did end up having them tick down and year-over-year terms because of base effects. And the market seemed to have received them favorably. So I'm curious if you think they changed the inflation narrative at all or-- everything's still running above target in year-over-year terms. 

JACK JANASIEWICZ: And I think that's the one thing that the hawks would probably take away from this is that inflation still remains fairly sticky, but I think there's signs that it could continue to come lower. When we think about core CPI, if you just look at that three-month annualized pace, it's coming in at around 1.6%. And that's the slowest that we've had since July of 2024. But when you look at the line items that were buried in the CPI print, I think it's hard to make the case that the inflation backdrop is broad basedYou had autos and auto parts were an uptick, and then personal computers and peripherals, which I guess you could lump together as part of the AI trade. And we all the story there. There's a ton of demand and not enough supply, and that's pushing up prices on top of Apple pushing through those price hikes for the iPhones. All those things are showing up. 

But again, what do price hikes really-- or rate hikes actually do for that backdrop? Not much. I think on the other side, shelter continues to move in the direction that we thought. It's moving lower, pushing back towards those pre-pandemic levels, which is good. But the key is super core, right? Super core is really all the rage. It's been all the rage. And we think about super core services, you're basically looking at core services, ex housing. And from the Fed's perspective, they like to watch that because it's an indication of what the labor market is telling with regard to potential wage pressures going forward. 

And that's coming in at around 2.3% annualized. And so it's sort of in line, I guess, going forward. But you start to check the ancillary data on wage front, and you're not really seeing wage growth there. So from that perspective, you could argue that if you expect to sustain push in inflation, it needs to be demand driven. How do you get demand-driven inflation? You need to see probably an increase in wage growth. And we're not seeing signs of that right now.

So, in our case, we're still thinking inflation is moving in the right direction over the longer term. It may not get there as soon as people want. And I think Warsh kind of alluded to that when he first made his speech where he said inflation has been above target for quite some time. The question is the solution from the Fed to hike rates to get inflation down, the byproducts could be potential recession because the things that are I think still pushing up inflation are maybe not necessarily sensitive to higher rates, so to speak. It's more of a supply and demand issue where supply is short on some of this stuff. 

BRIAN HESS: Yeah, the rate tool is a blunt one, to say the least. 

JACK JANASIEWICZ: Exactly, 100%. 

BRIAN HESS: But in your interpretation, the July inflation data was just more evidence that on an underlying basis, things are moving in the right direction. Yes, we're not quite there yet, but on the super core services, I mean, we're 30 basis points above the target. So that's really not that far off. And if the July employment report has anything to say about it, that could keep coming down because it certainly wasn't a very strong jobs report. 

JACK JANASIEWICZ: Yeah, and then you can mix in the retail sales number. And I get there's some issues in there with seasonals, and when Prime Day was. But I think going forward, you're still seeing some squishier data on the economic front. 

BRIAN HESS: Yeah, because there were downward revisions to the June data in that retail sales report. So if you take June and July together, it's a pretty soft two-month period for consumption or for retail sales anyway. 

JACK JANASIEWICZ: And I think if you start to look ahead, too, the risk, I think, is for slower economic growth. We just talked about limited wage growth going forward. The tax refunds are going to start to fade. Some of the fiscal impulse that we've seen really starts to fade in the back half of this year coming up. So I think at the margin, you're going to see slightly tighter financial conditions on top of real rates being higher than where we were at the start of the year. And that probably starts to weigh on the growth outlook in here. So the risk, I think, is still for a slowing economy, definitely not a recession backdrop but slowing. And that's probably going to help, at least at the margin, keep the inflationary pressures under control. 

BRIAN HESS: For sure. And so that's another reason for us to think, OK, maybe the bond market at the front end is a little bit ahead of itself in terms of thinking that this many rates are coming over the next year or by the end of this year. 

JACK JANASIEWICZ: Yeah, and there's a case to be made, if they don't go in September, then you're moving to midterms. It probably means they don't go at all. 

BRIAN HESS: It could be, so this might be their chance. 

JACK JANASIEWICZ: If they're going to do it, it's probably going to be-- that September meeting is going to be a big one. 

BRIAN HESS: That'll be interesting. Now one other note of-- sticking with macro, one other notable development since the last time we sat down for an episode was the US Treasury's intervention in the market for Japanese yen. So the New York Fed sold the Euros and bought yen on behalf of the Treasury. And this was the first time that the US government has intervened to support the yen, to try to strengthen it since the late '90s. I believe that they intervened to help weaken it back in 2012 or something like that after the earthquake over in Japan. 

But this is the first time in two decades that they've tried to strengthen the yen, and it ended up working. So it facilitated a move from around round $1.64 in dollar-yen-- so that's yen per dollar-- to $1.55, which means a strengthening for those who aren't trading currencies actively. You from $1.64 to $1.55, it means a strengthening of the yen. And it was a big move. It caught markets off guard. So I'm curious, why do you think the Treasury took that dramatic step? 

JACK JANASIEWICZ: Yeah, first of all, it's quite interesting. And I think it shows a little bit of Bessent's, hedge fund background where you're selling euros to buy yen. 

BRIAN HESS: Right, the less liquid market. 

JACK JANASIEWICZ: Yeah, it's pretty interesting that that's the path they chose to do that. But one, I think it's just to try to slow the depreciation of the yen, obviously, because then that puts a little bit more of the competing Asian currencies at risk as well for trying to keep in lockstep. And so they're going to move weaker as well. 

But I think the idea-- they were just trying to help out basically the Bank of Japan. They're considered to be, an ally, a trusted resource here for the United States. To give the Bank of Japan a little bit more firepower, all of a sudden, the Fed steps in and starts to intervene as well. I think that sends a pretty loud message across the market that depreciation or additional depreciation from that $1.65 level is probably not warranted. And so when you have both the BOJ and the Fed sort of drawing a red line, a dotted line, however you want to describe it, in the sand, maybe that gives it a little bit more oomph so to speak. 

And maybe the last piece that-- there is a little bit of a risk that if the Bank of Japan were to intervene, maybe they have to sell treasuries to buy dollars and then use those dollars to then buy yen. And so you get a little bit of pressure on treasuries as a result of that. And so there might have been some backchannel communications there. 

But one of the stories that hit was the idea that the 30-year was selling off on the back of the Bank of Japan selling treasuries. Central banks don't buy 30-year paper. They buy basically two-year and under. Maybe they get out to five years. So I think that 30-year story is a little bit of a misaligned narrative that fit, but it's not really, I think, what happens. But the point being, there was a risk that the Bank of Japan could have been selling short-dated treasuries to raise cash, and maybe that could have put a little more upward pressure on short rates right now, which is something the Fed probably doesn't-- or at least Bessent doesn't want to see. 

BRIAN HESS: No, no, I think he's described himself as the nation's top bond salesman, so he wants to keep the rates at a good place. All right, so you mentioned the Bank of Japan and the Treasury coordinating might help give the intervention some oomph. Do you think this will mark a more sustainable turn in dollar-yen? 

JACK JANASIEWICZ: That'll be an interesting question. In the past, interventions have not really stuck. 

BRIAN HESS: We're back to $1.59, by the way. So we've gone $1.64 to $1.55. We're up to $1.59. 

JACK JANASIEWICZ: I think the numbers that I had seen, $5 to $10 billion intervention, which is not really a huge number relatively speaking, in the FX markets. So I think at the end of the day, the interest rate differential is still going to reign supreme. And I think that's going to continue to put a little bit of pressure on the -- to continue to weaken back to levels. But we'll see when it gets back into that one $1.60, $1.65 area what traders start to do, or are they going to try to test the central banks in here and see if they come back in and intervene. 

BRIAN HESS: So the Bank of Japan meets in mid-September, similar to the Fed. And I think if they raise rates at that meeting, it would be a good reinforcement of the intervention. Because you're absolutely right that the big problem is just this massive gap between US short-term interest rates and Japanese short-term interest rates. And until that closes in a meaningful way, it's hard to envision material yen upside. I guess it doesn't mean that the yen has to continue trading lower and lower and lower, but it's hard to envision a meaningful rally. 

JACK JANASIEWICZ: Right. I agree. 

BRIAN HESS: And so it seems like it's probably going to take the Fed actually cutting rates in order to mark a meaningful turn from a trend standpoint in the end. But the governments are doing what they can to put a floor under it. And it might not make sense to fight the Fed and the BOJ or the Ministry of Finance over there at the same time. 

JACK JANASIEWICZ: Yeah, and it's tough. I think the BOJ is somewhat in a tough spot because they're finally getting the inflationary backdrop to pick up. You're seeing the wage growth starting to kick in. And the last thing they want to see is short circuiting that rally by suddenly hiking rates. 

BRIAN HESS: Well, Japan has had a history of policy missteps that have snuffed out burgeoning recoveries. So I think they're cognizant of that. 

JACK JANASIEWICZ: Probably overshooting to the other side by waiting too long, because I think you could probably get away with a couple of rate hikes in there. But point being, I think we're still a ways away before we start to see some stability in there because that rate gap is just too significant. 

BRIAN HESS: Yeah, for sure. OK, well, you mentioned the US Treasury might have been involved here because they're worried about the Japanese government selling treasuries and putting upward pressure on rates. And Treasury yields have been on the rise. So 30-year yields are at levels they haven't seen since 2007. 10-year yields are at the top of their post-COVID range or almost. They're almost there. 

But the thing is, the bond market weakness is not a US event. It's not isolated to the US market. We're seeing German bunds at their cycle highs. UK gilts are rising. I mean, Japanese yields at the long end are at levels we haven't seen in quite a long time. So I'm curious. Something I've been thinking about is why the coordinated sell off in global bond markets. We spent a few minutes not too long ago just talking about some of the slowdown risks in the economy. And yet, at the same time, there's this unrelenting rise in yields. What do you attribute that to? 

JACK JANASIEWICZ: Yeah, and I think maybe the first one to touch on real quick is just the steepening that we've seen in the curve, the bear steepener here in the United States. And I think that's a function of the market really not believing the worst comments that inflation will be under control. And I think the market was expecting to have a rate hike coming soon. And I think that's a function of the market not really believing what he's saying. And as a result, inflation may stick around longer. And that's what you get for the bear steepener there. 

But I think broadly speaking though, I think you're still seeing economic numbers coming in better than expected. I think people were still saying the odds of a recession were fairly high, relatively speaking, at the start of the year. Those odds have certainly slipped over the course of this year. And so when we start to decompose the move in nominal rates, at least in the 10-year part of the curve, almost all of that is being driven by real rates pushing higher. 

And then when you look at the term premium, when we decompose that, that term premium has really been a function of just the market repricing global interest rates moving higher over the course of the next couple of years. And so to me, it's a function of one, resilient economic growth, two, inflation being somewhat sticky, not just in the United States but broadly speaking, and then three, maybe oil prices are starting to feed its way into the inflationary outlook as well. 

And so put all those things together on top of just the amount of Treasury issuance we could be seeing around the world, not just here in the United States, but you talked about the NATO funding, the defense spend coming out of Europe, all those areas where you're going to have these massive deficits that-- or massive government spending programs that need to be financed, you could just see excess supply sort of being part of that story as well. And then the AI trade, you're seeing massive amount of issuance there. Is that starting to suck some capital away as well? So a lot of moving parts here-- maybe that's part of what we're seeing in terms of yields pushing higher across the globe. 

BRIAN HESS: You said a lot there. We could go down a lot of tangents. We're not going to do it because I don't want this episode to go on forever. But one thing that I find interesting is that if you think about the Fed policy rate, it's off its peak from a few years ago. You think about inflation, it's well off its peak from a few years ago. And yet, we're still making new yield highs in 30-year. So there's a little bit of a disconnect there. 

And I'm wondering if part of it has to do with the fact that bond markets were so manipulated for so many years through quantitative easing, and now we've had central banks stepping away from that, many pursuing quantitative tightening or letting bonds roll off their balance sheet, shrinking their balance sheet. And I'm just wondering if part of the story here might be that bond markets are learning to live without central bank support, and we're trying to find a new equilibrium level. 

JACK JANASIEWICZ: Normalizing, yeah. 

BRIAN HESS: Exactly. Do you—

JACK JANASIEWICZ: Certainly, absolutely. 

BRIAN HESS: There's credence in that? 

JACK JANASIEWICZ: Yeah, there's something to that as well. 

BRIAN HESS: Because I think if lack of QE or quantitative tightening is the culprit, it might change how we frame the narrative versus just a cyclical story like you were highlighting. If this is purely a cyclical story, I would say at current levels and with the slowdown risks we're seeing and with inflation decelerating, we're probably at buyable levels for a lot of these bond markets, or at least levels where you'd want to start looking at it very closely. 

But if it's an issue where the market's still searching for an equilibrium without government support, I don't see QE coming back anytime soon. So that might make it a little bit more difficult to figure out what could be the upside risk or the bear scenario for bonds. I'm curious if you think about-- how you think about the ceiling for 10-year rates in this kind of environment?

JACK JANASIEWICZ: Yeah, and I can't remember the ranges off the top of my head. But if we just simply go back to, I guess, periods where you didn't have central bank intervention or these macroprudential policies put in place, just looking at the typical shape of the curve where you look at whatever the policy rate is relative to the 30 year, you're probably looking at something between 150 to 200 basis points. 

So are we getting back to that level? We're certainly moving in that direction. And so I don't think it's that far out of the scope to say, we are normalizing back to periods that we saw previous to central bank intervention of buying treasuries. And this is what it looked like. 

BRIAN HESS: Yeah, central banks were compressing term premium, which is partly represented by the difference in short-term bonds and long-term bonds and their yields. And now they're no longer distorting that term premium. And so you're getting a little bit more curvature. 

JACK JANASIEWICZ: And I don't think we're that far off from those historical levels that we saw. Let's call it in the mid 1990s to the 2000s. 

JACK JANASIEWICZ: I think-- if anything, if you put a gun to my head and said, are we at the higher end of the range or the lower end, certainly at the higher end of the range. 

BRIAN HESS: You're better to buy. The next 50 basis points is more likely to come lower than higher pushing us through 5% on down. 

JACK JANASIEWICZ: Yeah, I think that's right. 

BRIAN HESS: All right, great. Well, we've covered the bond market extensively. We've even talked about currencies, which is a little bit unusual for us. So let's switch gears and hit on stocks. Global stock markets have been more or less on a tear since bottoming in April of last year around the tariff announcements, Liberation Day. There have been some corrections along the way, and momentum got hit badly in July, which we talked about last month on that episode. But I'm wondering, what might it take to reverse this powerful up move. 

JACK JANASIEWICZ: Yeah, I mean, right now, it's literally all about earnings. So anything that can filter its way into the earnings backdrop, that would significantly dampen them. I think that's the key. So we've talked about this a bunch. The CapEx backdrop really starts to cool markedly. And you start to see maybe potential the AI story revenues just aren't manifesting as the market's hinting to. Potentially, we actually get a little bit more of a hawkish Fed, so we get-- more rate hikes actually do come, maybe even more aggressively than what we've been thinking about. 

The economic backdrop takes a little bit of a hit if Iran starts to escalate with regard to the broader Middle East backdrop. And you start to see that through oil prices. And then maybe the last one to point to is just on the consumer front. We talked about this, but there is a potential for the consumer to slow down a little bit in here. And if that slowdown starts to materialize a lot quicker, I think that's going to filter its way through the earnings backdrop, too. 

So I think all of this comes back to earnings. What's the potential risk that we start to see earnings really starting to slow markedly? And I think it's really the AI trade. It's the CapEx, and then at the margin, the consumer. 

BRIAN HESS: I'm happy you brought up earnings because that's exactly what I wanted to talk about next. If I'm not mistaken, this year, S&P 500 earnings are expected to grow something like 15%. Is that kind of in the ballpark? 

JACK JANASIEWICZ: Yeah, and that's, I think, taking out the adjustments for these right-- or the markups for the investments. 

BRIAN HESS: That was how I looked at it. 

JACK JANASIEWICZ: Yeah, that's a big component to these 30% plus year-on-year numbers that we were seeing. 

BRIAN HESS: And that's even better-- sorry, last year was even better than 2026. So 2025 earnings were growing even quicker than 15% year-over-year. I mean, these are unusual levels. I think the long-term average earnings growth is something like 8% for the US stock market. And meanwhile, nominal GDP has been expanding at around a 6% year-over-year rate. So what I would like to is, how are these S&P 500 companies able to grow earnings so much faster than nominal GDP growth for several years running now? 

JACK JANASIEWICZ: Yeah, and I think you have to just point to margins, right? Margins are pushing back to all-time highs. We haven't seen these kind of levels in-- I think we're talking about on average, something north of 15%. And obviously, if you get into the sector basis, it's even more significant for things like tech. But that bottom line, that operation leverage, those multiple turns we're seeing I think are a function of the margin backdrop, which is a function of doing more with less. 

You're cutting costs. You're still being able to pull that top line revenue through. And maybe we start to see even more productivity gains start to manifest on the AI front. Maybe those margins continue to even get better. 

BRIAN HESS: I guess pricing power is part of the story here. It's the fact that there's supply-demand imbalances in some of these tech areas. And that's allowing margins to widen dramatically. And then I guess the composition of the index has helped as well. As you become more AI heavy, more tech heavy, you're looking at companies with naturally better margins. 

JACK JANASIEWICZ: And there was a story out I was reading last week. It was interesting. And I can't remember who wrote it, but they were going through the earnings transcripts, and those companies that mentioned specifically AI and could quantify the gains from the AI that they're using, their performance on the stock front and the earnings front were significantly better than the broader market. So we are seeing signs that if you can demonstrate productivity gains from AI and those are flowing right to the bottom line, quantify it. Markets are rewarding you. 

BRIAN HESS: And not only will the market reward you, but this article also gives hope that there will be a payback for all the AI investment, that we are likely to see a more sustainable margin expansion. 

JACK JANASIEWICZ: Exactly. 

BRIAN HESS: Jack, when we talk about the earnings growth being so rapid recently, do you think there's a lot of leverage behind it, or is there a lot of debt growth, just to put it in layman's terms, building up to support this earnings growth? Do we have to worry about an eventual Minsky moment where this reverses on us and we get the mean reversion from 15% to 20% earnings growth back to something below the long-term average? 

JACK JANASIEWICZ: Yeah, I think we are seeing leverage tick up. But I think where you're seeing the bulk of the tick up is really coming from the CapEx trade, all the hyperscalers issuing debt to finance their build outs. And these are some of the best companies in the world that are probably considered investment grade. So at the margin, you're seeing very, very good balance sheets taking on a little bit more debt. 

And I've seen some numbers where you look at the basic metrics for the average investment-grade company, and you could probably see, I think, another trillion worth of issuance from these kind of companies, and you'd still probably be in line with the median or mean valuation metrics. So I think, yes, we are seeing the leverage ratios tick up. But again, you're looking at some very, very strong balance sheets to begin with. And that just pushes them, I think, closer to the mean, so to speak. 

And you look at things like coverage ratios, they're still at or slightly above the long-term historical averages. And that's still pretty good. 

BRIAN HESS: So it's something we're watching. And there has been certainly movement there, but you do not think that the vast majority of the story here is excessive debt? Like in 2006, 2007 when we had rapid earnings growth in homebuilders, for example, that was clearly unsustainably financed by consumer debt. Not the case this time around. 

JACK JANASIEWICZ: I think you're just looking at very different balance sheets on the back that are supporting these. 

BRIAN HESS: Because the hyperscalers are just so well-established, such mega caps. 

JACK JANASIEWICZ: Yep. 

BRIAN HESS: OK. And that brings me to my last question for this month, which it's related to what we've been talking about on the stock market side. So for the past few years, small and mid caps have experienced very little earnings growth. Meanwhile, large cap earnings have been surging higher, and there's been nothing going on within small and mid-cap stocks. This is why they had been underperforming for many years. 

But this year, we're finally starting to see an inflection higher in the earnings for these smaller companies. And I'm wondering if we can just highlight what's behind that sudden change because it's allowed something like small cap value as a little sub industry subsector to do really well this year. 

JACK JANASIEWICZ: Right. Yeah, and we've always said you need three things for small caps to rally, right? One, cheap valuations, two, re-acceleration and growth, and three, rate cuts. And two and three operate hand in hand. You could say that small caps coming in were fairly cheaply valued. But we're certainly not seeing rate cuts, at least the market pricing in earlier this year, multiple hikes. 

BRIAN HESS: Correct. 

JACK JANASIEWICZ: And growth has been decent but not re-accelerating to the point where usually, you're coming out of a recession, so you're getting a massive upswing in the growth expectations. Those are usually when smalls really do well. So the typical ingredients aren't there, so it's a little bit of a surprise to that backdrop. And I know the leverage that we see with small caps tends to be pretty significant. So rate cuts are a huge impact because of that sort of falling immediately to the bottom line. 

BRIAN HESS: You mean that small companies tend to have a lot of debt, so they benefit from lower interest costs. 

JACK JANASIEWICZ: And that flows right to that bottom line because they're so leveraged to that. And so I think this time around, maybe the story is simply it's one, we didn't get that sort of economic slowdown that maybe some people were thinking about. So that's given a little bit of a better backdrop. Maybe you're also seeing the benefits of the CapEx trade flowing through to the mid-cap and small caps. So some of that CapEx spend is really flowing to the bottom line for-- or the top line for revenues for some of these mid and small names. 

And then the last one is maybe the same thing on the reshoring, onshoring idea that came a couple of years ago still working its way through the system, and you're starting to see that manifest as well. So I wish I had a better answer for you because it's a little bit of a different swing than we usually have versus what we're thinking about today. But yeah, certainly a good play. 

Maybe the last one I should highlight there is that people looking to take advantage of stronger earnings that are not reliant on these investment markups, so to speak, and you're not really going to have small caps being able to invest in all these chip companies and so on and so forth like you're seeing NVIDIA do, for example. And maybe it's just a cleaner way to take that same exposure. 

BRIAN HESS: Yeah, so there's a lot going on potentially. It's an area we could look into because it is interesting how, all of a sudden, we're seeing strong performance from this component of the market. And it's not necessarily the backdrop we would have expected it in. Maybe it has to do with the composition of growth changing. We have not seen major acceleration in overall GDP, but certainly where it's coming from has changed a lot, with tech investment punching above consumption in some quarters. And so that just might have maybe more of a multiplier effect. 

Maybe it's policy driven. Maybe it's lagged effects of the One Big Beautiful Bill reaching small companies. But regardless, it's been good for anyone invested there. And the valuations are still compelling if you look at them versus larger cap companies. So it's an area I think we should keep a focus on. 

All right. Well, that's it for this month. Thank you very much, Jack. I think we had—

JACK JANASIEWICZ: A lot to cover there. 

BRIAN HESS: --a lot to cover, lots of interesting questions, hopefully questions our viewers have also been wondering. And we'll see everyone next time. 

JACK JANASIEWICZ: Awesome. Thanks, Brian. 

BRIAN HESS: Thank you.