“If something cannot go on forever, it will stop.” – Herbert Stein
Stein wasn’t writing about cheap money, cheap energy, or unrestrained government spending, but he might as well have been. All three assumptions are being tested. While that adjustment could bring some near-term turbulence, it would mark a welcome return to an environment where fundamentals, not speculative momentum, matter again.
With the Middle East conflict at a stalemate and shipping constrained through the Strait of Hormuz and across the Red Sea, oil prices are hovering near triple digits. Emergency government stockpiles have been drawn down. Chinese imports, which pulled back in the spring, are rebounding and adding to demand. Saudi bypass pipelines have come under attack and sustained damage.
The immediate squeeze is not in oil, though, but in refined products like diesel and jet fuel. Disrupted transit through the Strait of Hormuz, together with Ukrainian strikes on Russian refineries, has tightened global supplies. Diesel fuels the economy – powering trucks, tractors and heavy equipment – so a price spike shows up almost immediately in the cost of freight, food and construction. Trucking company J.B. Hunt recently warned investors that “radical and abnormal” diesel spikes will hit earnings this quarter, and American and other major airlines are cutting flights to cope with surging jet fuel costs.
Higher energy costs are feeding into inflation, prompting the Fed to raise interest rates for the first time in three years while signaling more to come. “Unless underlying inflation is moving to our objective, clearly and at sufficient speed… we have work to do,” Fed Chair Kevin Warsh vowed in August at the Jackson Hole Economic Symposium. The bond market is taking him at his word.
The Fed sets short-term rates, but the market determines longer-term rates. As investors demand higher returns to compensate for sticky inflation, bond prices have dropped, pushing benchmark government yields to multi-decade highs. The 10-year Treasury yield is the most important price in global finance, because everything from mortgages to corporate borrowing costs is tied to it. It also impacts how investors value future cash flows across every asset class. When it rises, cash received later is worth less today, whether it comes from a stock, a building, or a private business.
Yields are rising for a few reasons: stubbornly high inflation alongside full employment, the Fed’s commitment to taming it, and structural federal budget deficits with no semblance of fiscal discipline. The national debt recently topped $40 trillion, over 120% of GDP. That level used to be reserved for major wars or deep recessions, when governments borrow heavily to stimulate a weak economy. This time it has been built up during an expansion.
Unhappy with the rise in yields, the Treasury Department announced in August that it would double the size of its long-dated bond buybacks, an intervention meant to put a cap on yields. Legendary investor Stanley Druckenmiller, one-time mentor to Treasury Secretary Scott Bessent, was not impressed. “Governments defending prices against fundamentals always lose,” he wrote in an op-ed. He was right. Yields quickly blew past the level Secretary Bessent fought to defend.
Higher yields suggest the era of cheap money has come to an end, and with it, the speculative projects that only worked at near-zero rates. The capital needed to fund the AI capex boom is getting both more expensive and increasingly selective. SoftBank’s U.S. data center and energy developer, SB Energy, postponed its Nasdaq listing after investors balked at its planned $50 billion valuation. Nuclear technology firm Holtec blamed “uncertainty over data center development” in shelving its planned IPO.
Most tellingly, AI bellwether OpenAI has ruled out going public this year. That listing had been expected to help fund an infrastructure bill running into the hundreds of billions through the end of the decade – a tab that, for now, must be financed solely with private capital. Meanwhile, rival heavyweight Anthropic still plans to tap the public markets. A prospectus reviewed by Reuters shows more than $500 billion in planned cloud and compute spending in the coming years, much of it under non-cancelable contracts. The AI boom depends on capital markets’ willingness to keep funding these large bills, so it’s a risk we’re monitoring.
The silver lining is that the end of easy money helps to restore fundamental sanity to investing. Higher yields are already increasing the income we earn on our cash reserves, while market volatility creates the very mispricings that allow us to acquire high-quality, durable businesses at a meaningful discount. During the quarter, we selectively trimmed or exited positions in more fully invested accounts to ensure every client maintains ample liquidity and dry powder. We also initiated a new position and added to an existing holding.
Celsius Holdings (CELH) is the number three player in the fast-growing U.S. energy drink market, behind Monster and Red Bull, with roughly 20% market share. Between the core Celsius brand and the recently acquired Alani Nu, the company dominates within a coveted demographic in the category, the female consumer. Celsius has been pruning smaller, slower-growing flavors to streamline its lineup. Recent sales data suggest a growth stall, which has weighed on the stock, but the flavor rationalization should be completed soon, setting the stage for growth to resume next year. Alani, meanwhile, remains strong. We believe the current multiple undervalues the business and, as top-line growth returns to the core Celsius brand, we expect the valuation to expand.
We have owned Sprouts Farmers Market (SFM) in some accounts since 2019 and used recent weakness to add it to selected accounts this quarter, after CEO Jack Sinclair said he will step down in January and become Executive Chairman. We see this as an orderly succession rather than the end of the growth story. Incoming CEO Nick Konat has been the key operator behind the recent operational improvements and already has credibility with investors. The core playbook remains intact: a smaller-box store format built around the health-focused customer, a fresh and differentiated assortment, and steady, disciplined new-store growth. Sprouts opened its 500th store this quarter and still sees potential for more than 1,000. We used the headline-driven sell-off as an opportunity to build our position.
Periods of market volatility are always easier to navigate alongside clients who share our long-term perspective. Preserving and growing the capital you have built remains our singular focus. Thank you for the privilege of your continued trust and partnership.
Penn Davis McFarland, Inc.
October 2026
