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Both Engines Are Running.
Hoxton Blog • Both Engines Are Running.
For most of the last decade, long-term investors were asked to make a difficult trade. If you wanted growth, you owned stocks. If you wanted income and ballast, you owned bonds, but bonds yielded next to nothing. The 60/40 portfolio still worked, but only one engine was really pulling.
This week, two charts crossed our desk that, taken together, tell a different story. Stocks are rallying because corporate earnings are sharply higher than analysts expected. And bonds, for the first time in fifteen years, are starting to look genuinely attractive on the basis of their yields alone.
Both engines are running. That has not been true for a long time.
1. The Rally Has Real Fundamentals Underneath It
The first chart is a simple but powerful one. It shows the consensus estimate for what S&P 500 companies are expected to earn per share in the first quarter of 2026, tracked over the past year as analysts have updated their forecasts.
S&P 500 Q1 2026 Earnings Expectation (Consensus Estimate)
For most of the past year, the line has been almost flat. Analysts sat near $70 per share all the way from May 2025 through to the spring. Then, as actual results started rolling in, the line took off. As of 20 May, the consensus estimate sits at $80.36 per share.
That is a 15% upward revision in a matter of weeks. It is not a forecast that has improved. It is a forecast that got run over by reality.
This matters because it answers a question many investors have been asking quietly. With markets at record highs, with the Iran conflict still unresolved, and with oil bouncing on every headline, is the rally real, or is it just sentiment running hot?
The chart says it is real. Earnings power has expanded. Companies have delivered profits well above what professional forecasters expected. When that happens at scale, stock prices respond, not because investors are excited, but because the businesses themselves are worth more. That is how it should work. That is how it does work when fundamentals lead, and prices follow.
“Markets in the short run are voting machines. In the long run, they are weighing machines.”
Benjamin Graham wrote that nearly a century ago, and it has held true through every era since. This week’s chart is the weighing machine doing its work. The voting will continue to be noisy, but the weight has just gotten heavier.
2. Bonds Are Paying You to Own Them Again
The second chart is, in some ways, more important. It addresses something most investors do not realise has fundamentally changed: the starting yield on a 10-year US Treasury is now one of the most useful pieces of information you have about your bond portfolio’s likely return.
U.S. 10-Year Starting Yield (X) vs Forward 10-Year Annualised Return (Y)
Each dot on this chart represents a different month since 1999. The horizontal axis is the starting yield on the 10-year Treasury in that month. The vertical axis is the actual annualised return the bond delivered over the following ten years. The relationship is almost linear: where the starting yield went, the next decade’s return followed.
Today’s starting yield is 4.6%. Apply that to the historical relationship, and the implied 10-year annualised return for an investor buying Treasuries today is roughly 5.6%.
It is worth pausing to appreciate what this means. For most of the period from 2010 to 2022, the 10-year Treasury yielded between 1% and 3%. Anyone buying bonds in that window was, by the same arithmetic, locking in returns of 1–3% for the next decade. That is not a portfolio anchor. That is a tax on patience.
Today’s 4.6% yield is in a completely different neighbourhood. A balanced portfolio with a meaningful allocation to high-quality bonds now has an income engine that compounds at a respectable real return. That has not been the case for fifteen years.
And here is the part the chart understates: this is not a forecast. It is an arithmetic relationship. A 10-year bond bought today and held to maturity will deliver, with very high confidence, an annualised return very close to its starting yield. The bond market has finally given long-term investors something to work with.
3. Why This Combination Is So Rare
Take the two charts together, and a picture forms that has been absent from markets for a very long time.
• Stocks: the rally is being driven by earnings that are sharply outpacing forecasts. The fundamentals justify where prices are.
• Bonds: the starting yield is high enough that simply holding to maturity now delivers a meaningful real return.
Combine the two, and the case for a diversified, long-term portfolio is the strongest it has been in over a decade. The equity engine is running on real corporate profits. The bond engine is running on real interest income. Neither one is relying on hope, low rates, or central-bank rescue.
Most periods in market history have one engine running well and the other struggling. The 1990s had brilliant equity returns, but bonds were uninspiring. The 2010s had decent equities, but bonds yielded nothing. The early 1980s had high bond yields but a deeply troubled stock market. Having both engines pulling at the same time is the exception, not the rule. And it is the environment in which long-term, patient capital tends to do its best work.
4. The Other Things That Happened This Week
Worth noting alongside the bigger picture:
Oil ticked back up mid-week after Iran’s supreme leader issued a directive to keep enriched uranium within the country. Brent moved back above $105. The diplomatic dance continues to swing day-to-day prices, but the broader direction, toward a managed resolution, remains intact.
Q1 earnings season effectively ended. With 89% of companies reported, 84% beat earnings estimates by an average of 18.2%, the highest beat rate since Q2 2021 and the largest surprise margin since Q1 of that same year. Eleven sectors are reporting revenue growth. This is breadth, not concentration.
Treasury yields eased modestly on Wednesday as Fed minutes confirmed that policymakers are willing to hold rates higher for longer if the Iran conflict keeps inflation elevated. The 10-year sits around 4.6% as of week’s end, the same yield that anchors our second chart.
5. What This Means for Your Portfolio
Three honest answers to three questions clients have been asking us this week:
“Should I add more to stocks now that earnings look so strong?” Probably not in a tactical sense. If your equity allocation already reflects your goals and time horizon, the right answer is to let the strong earnings work for the shares you already own. Chasing a rally rarely ends well; participating in one because you were already invested is the entire point.
“Should I move money into bonds now that yields are higher?” If your portfolio has been underweight bonds for years, as many have been, because yields were so unattractive, this is a reasonable moment to revisit that balance with us. A 4.6% starting yield is meaningfully different from a 1.5% starting yield in what it can do for long-term returns and overall portfolio stability.
“Should I be worried about Iran, the consumer, the Fed, or anything else in the headlines?” Worried, no. Aware, yes. None of those stories changes the long-term arithmetic of compounding. They will change short-term prices, sometimes uncomfortably. The two charts in this note exist precisely because the underlying signal, earnings, yields, is so much stronger than the surrounding noise.
6. The Long View
Every long-term investor experiences periods where the news cycle and the underlying fundamentals tell different stories. This is one of those periods, and the gap is unusually large in the right direction. The headlines are about conflict, political wobbles, sticky inflation, and a noisy consumer. The fundamentals are about $80 earnings per share, a 4.6% starting yield, and the strongest earnings beat rate in five years.
When those two diverge, the headlines win the day, and the fundamentals win the decade. The investors who do best are the ones who learn to tune their attention accordingly. Less time on the day-to-day. More time on what the data is actually saying about the next ten years.
On the basis of this week’s two charts, what it is saying is encouraging. Stocks have real profits behind them. Bonds have real yields behind them. And a patient, diversified investor finally has both engines pulling at once.
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