When Everything Yields the Same

Hi, Tom here.

We're almost halfway through the year—what a ride it's been. I hope you're able to slow down and enjoy some quality time with your family during these amazing months.

Today's edition tackles a fascinating phenomenon quietly playing out in the market, directly impacting your portfolio: the convergence of yields.

It’s worth paying attention to.

Let's dive in.

There’s a puzzle playing out in your portfolio.

It's subtle, important, and James Mackintosh at the Journal captured it perfectly last week:

Today, nearly every asset class—stocks, bonds, and even cash—is yielding around 4.5%.

I was up at the lake last weekend with four generations of family. Between conversations, grilling, and kids running around, one question kept popping up:

“Tom, what should I be doing with my stocks?”

Fair question. Especially with the conflicts of 2025 heating up and yields flattening across the board.

So let’s talk about what to do when everything feels different—but underneath, your investments are actually yielding about the same.

Here's the first thing you need to know: Investment returns are uniquely tethered to interest rates.

This visual explains exactly what's happening:

Think of interest rates like gravity for business growth.

See that black hole pulling everything downward? That’s the cost of capital (interest rates).

The lower the rates, the easier profits lift off. The higher the rates, the more drag—the harder it is for projects to clear the bar.

You saw this last week with Chipotle's expansion example:

Same thing with housing. Today’s mortgage rates might be historically average, but they feel high because they're dragging affordability down in a way we haven't seen in years.

This isn't rocket science.
It's financial gravity.

And now gravity has pulled everything into the same orbit:

Cash, bonds, and stocks are all yielding about the same.

Risk Cannot Be Avoided (But It Can Be Managed)

As you approach retirement—or perhaps you’re already there—risk becomes personal. It moves from theoretical to practical.

You’re counting on your portfolio to do two critical things:

1. Provide consistent income to fund your lifestyle today.

2. Deliver growth that beats inflation and secures your future.

That’s why the current environment, where the biggest asset classes are converging to yield about 4.5%, is more than just curious. It’s consequential.

James Mackintosh captured the tension well:

To make sense of why this matters, here’s a quick, practical refresher on what you own and why you own it:

• Cash: Traditionally your safest short-term holding. Right now, you’re paid about 4.5%. High by recent standards, but remember: cash yields shift quickly as rates change.

• Treasurys: Loans you make to the U.S. government. Currently paying about 4.5%. Historically secure, these anchor your portfolio and smooth volatility, but don’t drive significant growth.

• Corporate Bonds: Loans to companies, yielding around 5.25–5.5%. Higher yield, slightly higher risk. These help stabilize income but won't deliver outsized returns.

• Stocks (Earnings Yield): Equities give you ownership in business profits. Today’s earnings yield is about 4.5%—similar to bonds—but unlike bonds, stocks can grow if profits accelerate.

This brings us to a fascinating chart:

Everything is yielding around 4.5%.

At first glance, your portfolio looks diversified—different accounts, different funds, different strategies. But right now, they're converging. It’s like having multiple radio stations all playing the same song.

This is exactly what my grandfather was questioning at the lake: “Why hold stocks at all if fixed income gives me about the same return?”

He’s right to question it. Maybe you’ve wondered this, too:

“Tom, should I just sell my stocks and simplify everything?”

Short answer: Probably not.

If you look at the chart above, you’ll notice something unusual:

This level of convergence hasn’t happened in over 40 years.

It might persist for longer—but history suggests it won't last forever. Something eventually breaks the calm: a financial crisis, a trade war, a pandemic, or some new threat the market doesn't yet see.

When asset classes diverge again, significant opportunities re-emerge.

So the critical question now is:

What should you do right now, knowing this?

The honest answer?
We don’t know exactly when divergence will return—or precisely how it will look.

No one does.

That uncertainty isn’t a flaw in your portfolio or your approach. It's simply how markets work.

But it does prompt a better question—one I’d be asking myself right now:

“If everything yields roughly the same, what am I actually being paid to own?”

Let's zoom in briefly on equities.

What ultimately drives stock prices higher?

Earnings growth.

Think of earnings growth as how you built your own wealth over time:

• Your income increased.

• You invested part of your earnings.

• Those reinvested earnings compounded, growing even more.

Markets reward earnings growth, and punish disappointments.

Right now, the market is pricing in one, gigantic, once in a lifetime idea:

That AI will drive a productivity boom, accelerating profits substantially.

That’s the bet, and things are almost defying financial gravity.

• Meta is offering 9 figure recruiting packages for s AI engineers.

• Governments (the richest entities in the world) are pouring money into AI.

• ChatGPT already has 800m users.

AI is the play, and it’s pushed the earnings yield on the equity market down to fixed income levels.

Will this AI-driven productivity come to fruition?
It sure looks like it, but there will be collateral damage along the way.

So for your equity allocation, understand this:
There’s a lot of noise out there, and AI is the game that is fueling the hopes of future profits.

So for your portfolio, ask:

• Am I diversified given this environment?

• Do I understand the role each asset plays, not just today, but in a world where divergence has returned?

• And if the AI thesis doesn’t pan out like it’s suppose to, and with the other risks on the table at the moment, what else in my portfolio gives me a shot at real returns?

Today’s flat-yield environment illuminates many risks in the markets while simultaneously showing us the power of technology.

The smarter question isn't, "What should I buy?" It's this:

“How am I positioned for a divergent market event.”

Right now, AI optimism feels like anti-gravity investing. It’s lifted valuations, fueled corporate spending, obscuring the normal pulse of investing amidst an inflationary environment.

But remember, interest rates? They’re still financial gravity. They eventually pull valuations back into alignment eventually.

If history says anything to us, it’s that this convergence won't last forever.

Stay nimble, stay thoughtful, enjoy the gains —and above all, understand your positioning.

If you're not sure what role each asset in your portfolio is playing right now — or how you’ll respond when gravity returns — let’s talk.