For the first time since Y2K, the math has flipped. The 10-year Treasury (~4.23%) now outyields the S&P 500’s forward earnings yield (4.15%), creating a negative equity risk premium, a phenomenon we’ve seen exactly twice in modern history, both preceding significant market resets. But here’s the kicker: inflation-protected bonds (TIPS) are paying 1.94% real while equity dividends deliver -1.1% after inflation. Translation: The “risk-free” rate isn’t just competitive, it’s winning.
The Great Rotation: Follow the Money, Trim the Hype
Where Value Lives Now
U.S. Treasuries (ACCUMULATE: 20-35% of portfolio)
- The Play: Ladder 5, 10, and 30-year maturities via TLT, IEF, or direct Treasury purchases
- The Math: 4.23% nominal, 1.94% real – paid to wait with zero credit risk
- The Kicker: Positive convexity if growth stumbles
TIPS (ACCUMULATE: 10-15%)
- Vehicles: VTIP (short-term), SCHP (broad), or individual TIPS
- Why Now: Real yields >1.3% with built-in inflation hedge
- Sweet Spot: 5-10 year maturities balancing yield and duration risk
Investment-Grade Credit (ACCUMULATE: 10-20%)
- ETF Options: LQD, VCIT, IGIB for broad exposure
- Current Yield: ~4.9% effective
- Individual Names: MSFT bonds 2034s, JNJ 2033s, BRK bonds (any maturity)
- Strategy: A/BBB rated, 5-10 year ladders
Where Froth Lives (And What to Do About It)
Mega-Cap Tech/AI (REDUCE to benchmark weight)
- Reality Check: NVDA at 35x forward, META at 27x, GOOGL at 24x
- Action: Trim winners, use covered calls on remainder
- Exceptions: Keep MSFT (24x with fortress balance sheet), AAPL (28x but capital return machine)
- Sell: TSLA (60x forward), unprofitable SaaS at >10x sales
Utilities “AI Power Trade” (HOLD/REDUCE)
- Overvalued: SO at 20x, DUK at 19x (historically 15-16x)
- Better Play: Grid equipment—ETN (Eaton), EMR (Emerson), GNRC (Generac)
- Clean Alternative: NEE (NextEra) if you want utility exposure with renewable growth
- Action: Take profits in traditional utility winners, rotate to suppliers
Speculative Crypto (REDUCE to 1-3% max)
- Current State: BTC near $100k, ETH at $3,500
- If You Must: GBTC or ETHE for tax-advantaged accounts, COIN for equity exposure
- Avoid: Alt-coins, DeFi tokens, anything you saw on TikTok
Sector Rotation: The Millennial’s Guide to Not Getting Wrecked
The Accumulate List
Energy Alternatives (5-10% allocation)
For Traditional Energy Exposure:
- Integrated Oils: XOM (Exxon), CVX (Chevron) – both yielding 3%+ with fortress balance sheets
- Pipelines: ENB (Enbridge) at 6.5% yield, KMI (Kinder Morgan) at 5.8%, EPD at 7.2%
- Natural Gas: LNG (Cheniere) for LNG export plays
For Clean Energy Exposure:
- Renewable Yieldcos: BEP (Brookfield Renewable) at 5.1%, NEP (NextEra Partners) at 5.8%
- Solar Leaders: FSLR (First Solar), ENPH (Enphase)
- Renewable Utilities: NEE (NextEra) at 3.2% yield with 10%+ growth
- ETF Options: XLE for fossil fuels, ICLN for clean energy
Grid/Electrification Industrials (5-10%)
- Pure Plays: PWR (Quanta Services), GNRC (Generac), HUBB (Hubbell)
- Diversified Winners: ETN (Eaton), EMR (Emerson), AME (AMETEK)
- Transformer/Equipment: DOV (Dover), ROK (Rockwell Automation)
- ETF Alternative: GRID for infrastructure exposure
Quality Small Caps (5-8%)
- Profitable Growers: KNSL (Kinsale Capital), RYAN (Ryan Specialty), PCTY (Paylocity)
- Industrial Winners: RBC (Regal Rexnord), ATKR (Atkore), EME (EMCOR)
- ETF Options: SPSM (S&P 600), XSVM (small-cap value)
- Avoid: ARKK holdings, anything with negative FCF
REITs ex-Office (5-10%)
- Industrial: PLD (Prologis) at 3.5%, STAG at 4.2%, TRNO (Terreno) at 3.8%
- Residential: AVB (AvalonBay) at 3.3%, EQR (Equity Residential), MAA (Mid-America)
- Cell Towers: AMT at 3.2%, CCI (Crown Castle) at 5.4%, SBAC at 1.5%
- Data Centers: EQIX (Equinix), DLR (Digital Realty) at 3.5%
- Sustainable Infrastructure: HASI (Hannon Armstrong) at 5.5%
- Avoid: BXP, VNO, SLG (all office)
The International Arbitrage
Europe (10-15% of equity sleeve)
- Quality Names: ASML, Novo Nordisk, LVMH, Nestle, SAP, Schneider Electric
- ETF Options: VGK, IEUR, or hedged versions like HEDJ
- UK Value: HSBC, GSK, Unilever all trading at attractive valuations
- Currency Play: Consider FXE for euro exposure if dollar weakens
Emerging Markets (5-10%)
- Asia Tech: BABA at 10x earnings, TSM (Taiwan Semi), Samsung
- India Play: INDA or MINDX for India exposure
- Broad EM: VWO or IEMG, or EMXC for EM ex-China
- Specific Names: VALE (Brazil), INFY (India), KB (Korea)
The Three Scenarios That Will Define Your Returns
Base Case: “Range-Bound Purgatory” (50% probability)
- 10-year yield: 3.9-4.4%
- Winners: BRK.B, JNJ, PG, COST, V, MA (quality at fair prices)
- Portfolio: 35% bonds, 40% equities, 15% alternatives, 10% cash
- Thesis: Grind sideways while earnings catch up to valuations
Bear Case: “Yield Shock Reality Check” (30% probability)
- 10-year yield: 4.5-5.0%
- Winners: SHY, BIL (ultra-short bonds), Consumer staples (KO, PEP, CL)
- Losers: Growth tech, REITs, utilities
- Portfolio: 45% bonds (short duration), 30% defensive equities, 25% cash
Bull Case (for Bonds): “Growth Scare 2.0” (20% probability)
- 10-year yield: 3.25-3.75%
- Winners: TLT, EDV (long bonds), cyclicals (CAT, DE, BA)
- Portfolio: 50% long bonds, 35% cyclical equities, 15% cash
- Catalyst: Recession fears or financial accident
Implementation: The Monday Morning Action Plan
This Week
- SELL: ARKK, unprofitable tech (ROKU, SNAP, HOOD if unprofitable)
- BUY: TLT if 10-year yields hit 4.3%, IEF for intermediate exposure
- REDUCE: SPY/VOO allocation by 20%, QQQ by 30%
Next 30 Days
- BUILD bond ladder: 30% SHY (1-3yr), 40% IEF (7-10yr), 30% TLT (20+yr)
- INITIATE: Europe via VGK or specific names (ASML, Nestle)
- RESEARCH: STAG, TRNO for industrial REIT exposure
- START: Dollar-cost averaging into SCHP (TIPS)
Next Quarter
- ADD: Quality dividend growers on weakness (JNJ, PG, JPM)
- ACCUMULATE: Infrastructure plays (PWR, ETN, or renewable yieldcos like BEP)
- POSITION: Small-cap value via SPSM or AVUV
The Risk Management Reality Check
Quality Screens That Actually Matter:
- Cash Machines: MSFT, GOOGL, BRK.B, JNJ (FCF yield >4%)
- Dividend Aristocrats: JNJ, PG, KO, CL, PEP (25+ years of increases)
- Balance Sheet Fortresses: Companies with net cash or debt/EBITDA <2x
Factor Diversification:
- Quality Growth: MSFT, V, MA, GOOGL
- Value with Catalysts: BAC, JPM, BRK.B
- Income Generators: ENB, O, MAIN, ARCC (or BEP, NEP for clean alternatives)
Position Sizing Discipline:
- Core positions: 3-5% max (BRK.B, MSFT, JNJ)
- Satellite bets: 1-2% max (individual small caps)
- Crypto/speculation: <1% (BTC via GBTC if at all)
Specific Trade Ideas for Different Risk Appetites
Conservative (Preserve Capital + Income)
- 40% Treasury ladder (SHY, IEF, TLT)
- 20% IG corporate bonds (LQD or individual MSFT/JNJ bonds)
- 20% Dividend aristocrats (NOBL ETF or JNJ, PG, KO)
- 10% REITs (O, STAG, AMT)
- 10% Cash (SGOV, BIL)
Moderate (Balanced Growth + Income)
- 25% Treasuries (IEF, SCHP)
- 15% IG credit (VCIT)
- 25% U.S. quality (VIG or MSFT, BRK.B, JPM)
- 15% International (VGK, VWO)
- 10% REITs (VNQ or PLD, EQIX)
- 10% Energy/Infrastructure (XLE, ENB, or BEP for clean alternative)
Aggressive (Maximum Opportunity)
- 20% Long bonds (TLT, EDV)
- 30% Quality tech on dips (MSFT, GOOGL, AMZN)
- 20% International value (European banks, EM tech)
- 15% Small-cap value (AVUV, SPSM)
- 10% Energy/Infrastructure (mix of traditional and renewable)
- 5% Lottery tickets (COIN, beaten-down growth)
The Bottom Line: Carry Is King, Growth Is Optional
Must-Own Core (regardless of scenario):
- BRK.B – Buffett’s cash pile becomes valuable when markets crack
- MSFT – Actual monopoly with 30%+ margins
- JNJ – AAA-rated dividend aristocrat
- Treasury exposure – Via TLT, IEF, or direct purchases
- Income Infrastructure – ENB/KMI (traditional) or BEP/NEP (renewable)
The Avoid List:
- ARKK and its holdings (ROKU, HOOD, etc.)
- Office REITs (BXP, VNO, SLG)
- Unprofitable SaaS at >10x sales
- Meme stocks (AMC, GME unless gambling)
- Chinese ADRs without clear regulatory path
Target Portfolio with Tickers:
- 35% Fixed Income: TLT (10%), IEF (10%), SCHP (10%), LQD (5%)
- 40% Equities: VTI (15%), VGK (10%), VWO (5%), Quality picks (10%)
- 15% Alternatives: VNQ (5%), GLD (5%), Infrastructure (5%)
- 10% Cash: SGOV or money market
This isn’t about timing a crash. This is about recognizing when you’re being paid to take risk versus when you’re paying for the privilege. Right now, bonds pay you to wait while equities demand you believe. The math is clear: patience pays 4%+, while chasing returns at 24x earnings is a loser’s game.
To Reiterate: When Treasuries yield more than the S&P’s earnings yield, only momentum traders and index funds stay fully invested. For everyone else, it’s time to get paid for patience and only take risk where you’re genuinely compensated. The boring portfolio (heavy in bonds, quality stocks, and real assets) is suddenly the smart portfolio. Whether you choose traditional energy for yield or renewable energy for growth, the key is avoiding overvalued tech and embracing what actually pays. Embrace it.
