Stock Picking at a Premium

Against what is now a six-week stock market correction, investors are having to reset their expectations for 2026. What seemed like a certainty of bullish conditions has given way to war-inflicted inflation, Anthropic disruption, TSA disarray, AI induced job displacement, tariff uncertainty and higher energy prices that are biting into the tax benefits of the “One Big Beautiful Bill.” It is a quagmire of challenging issues.

If this set of headwinds wasn’t enough to contend with, the more troubling development is the rise in Treasury yields and the poor performance of the most recent Treasury auctions. Wholesale inflation is sticky and will be stickier with $100/barrel WTI oil.

Last week’s poor Treasury auctions have indeed become a major talking point. When a Treasury auction goes off where investors are demanding a higher premium to lend to the government, even when the dollar is higher, it waves a caution flag. This recent string of weak demand is the worst the market has seen in over three years.

The primary reason for the tepid demand is a shift in the risk-reward calculation for safe-haven assets. With the conflict involving Iran entering its second month, investors are widely concerned of a long-term energy shock. If oil stays above $100, inflation won’t just be sticky, but could re-accelerate. No one wants to lock in a 4.4% yield on a 10-year note if they think inflation might hit 5% again.

The market is finally choking on the sheer volume of U.S. debt. With $10 trillion needing to be refinanced this year alone, and the Pentagon seeking massive supplemental funding for the conflict, bond vigilantes are starting to push back against the supply.

Earlier this year, the market expected multiple rate cuts. After these auctions, those odds have cratered. The two-year yield surged roughly 60 basis points in March alone. The market tell in these auctions isn’t just a technical glitch; it has real-world consequences that are currently rippling through the economy.

The market is sending a clear signal to Washington: the era of cheap debt is over as long as energy prices and geopolitical risks remain unanchored. Because the 10-year Treasury is the benchmark for home loans, the 30-year fixed mortgage average has jumped back toward 6.6-6.8%, stalling the spring housing market.

It is understood by most seasoned investors that the stock market looks six-to-nine months out and prices the market accordingly. High-multiple tech stocks have been victim to a clear rotation out of growth and into other sectors as a result. Buying the dips on the Magnificent Seven, cybersecurity, enterprise software and a host of other high P/E Wall Street darlings have not worked out of late.

The bottom line is this — there is no denying that the war in Iran is bigger and more extreme than President Trump and his advisors planned for. It is now clear that Iran has been planning for this conflict for a long time. If things are going so well according to Trump, why is the Strait of Hormuz still closed? Why haven’t the Houthis, Hezbollah, Hamas and other proxy forces supported by Iran been smashed? Because the IRGC has an effective guerilla marine warfare strategy.

Thousands of small, one-way attack drones (Shahed-series and newer variants) are launched from mobile trucks hidden in the rugged Zagros Mountains along the coast. You can’t sink a truck hidden in a cave as easily as a ship at sea.

That is the core of the decapitation paradox currently haunting the Pentagon. While Operation Epic Fury succeeded in its tactical goal of severing the head of the regime, the political vacuum has been filled by the most uncompromising elements of the security state. By eliminating the old guard clerics and traditionalists, the United States effectively removed the only voices in Tehran who viewed survival through the lens of cautious diplomacy.

In their place, a military junta has emerged, led by the Habib Circle, a group of IRGC hardliners who have spent decades preparing for exactly this kind of holy war. Hence, the United States, Israel and their newly aligned allies have to bring in the assets to eliminate the IRGC hierarchy and splinter their forces to liberate the country. Anything short of this objective is only going to foment a resurgence of fanatical theocracy in the future.

But here is the good news: there are pockets of equities that are working within a market suffering from widespread technical damage. The pace of data center construction and engineering continues to soar. Domestic chemical companies are in major rally mode as their primary feedstock is U.S.-sourced cheap natural gas. Space stocks are moving up and to the right as spending on the final frontier is accelerating, and select healthcare and utilities are trading higher.

This week will be instrumental in how the momentum of winning in Iran goes for the White House and the U.S. forces. Significant progress is required for the market to recover, and no one understands this better than Donald Trump. My Breakout Blue Chip Trader service is finding high-quality trades within this volatile landscape where I recommend blue chip stocks that are breaking out to the upside with a corresponding call option for option traders. Click the link here and put my system to work for your trading portfolio!