In a wide-ranging conversation on Excess Returns with hosts Matt Zeigler and Justin Carbonneau, Schwab's Chief Investment Strategist Liz Ann Sonders delivers what amounts to a field guide for navigating one of the most structurally unusual markets in modern financial history.¹ The thesis is neither bullish nor bearish in the conventional sense. It is something more demanding: a call for intellectual honesty about a cycle that refuses to behave like one.
A Cycle That Won't Run in a Straight Line
The place to start, Sonders argues, is the economic backdrop — and specifically, the error of applying a linear framework to a non-linear reality. "We can't think of this cycle in linear terms," she says. "Sectoral recessions and expansions in the economy are happening at different times." Manufacturing rolled into contraction while services boomed, then services softened as manufacturing rebounded. The result is an economy that confounds headline readings because the aggregate conceals a rolling series of sub-cycle dislocations playing out beneath the surface.
That structural churn feeds directly into market behavior. The key players in today's market, as Sonders notes, "in many cases have time horizons measured in nanoseconds," and rapid-fire rotations are the predictable consequence of sectoral asynchrony colliding with algorithmic participation. The market is not temperamental by accident. It is temperamental by design.
From Great Moderation to Unstable Era
The conversation turns quickly to the macro regime shift that underpins everything else. Sonders walks through the transition from the Great Moderation — the era running roughly from the late 1990s through the 2022 inflation spike, defined by moderate volatility, a disinflationary backdrop, and bond yields keying off growth rather than inflation — to what she now describes not as an "uncertain" environment but an "unstable" one. The distinction is deliberate. "I think unstable is the better un-word to describe the current backdrop than the simple, more simple word of uncertain."
In practical terms, the shift matters enormously for portfolio construction. During the Great Moderation, bonds and stocks were positively correlated in price movement (inversely correlated in yield-price terms), making the 60/40 framework function as advertised. In the temperamental era of the mid-1960s to the late 1990s, inflation drove yields higher without commensurate growth benefits, and stock-bond diversification was largely illusory. Today, the regime has shifted again into negative correlation territory, and Sonders believes this is secular, not cyclical. The implication is not that investors abandon fixed income, but that they think more broadly. "There's been so much democratization of access to other asset classes," she observes, pointing to private credit, private equity, commodities, and real estate as tools that enable something closer to an endowment-style approach.
Rebalancing as an Active Edge
On portfolio positioning, Sonders is direct. Cookie-cutter answers are insufficient. What she advocates instead is a shift from calendar-based rebalancing to volatility- or portfolio-based rebalancing. "Portfolio or volatility-based rebalancing is what gives you an edge in this environment," she says, because it increases frequency and forces the investor to do "a version of buy low, sell high, which is add low, trim high." The anecdote she shares from a client event in the Bay Area is instructive: an investor with a large concentrated Nvidia position sold 5% at the advisor's suggestion, the stock then rose 20%, and the client was unhappy. Sonders's response cut through the cognitive bias cleanly: "Would you really have been happier if the 95% of the position you still own went down by 20%?"
The broader point is that "rotation is the new momentum trade," and the broadening-out thesis has structural legs. Equal-weight is outperforming cap-weight. Small caps are gaining ground. Active management has had its best start to a year in many years relative to passive. Sonders is clear that both active and passive deserve a place in portfolio, but she is equally clear that the days of monolithic investing in a cohort like the Mag 7 are over. "I think the days of monolithic investing, whether it's in the Mag 7 or some other cohort, those days are gone."
Immigration, Labor, and the Fiscal Arithmetic
Two structural headwinds receive sustained attention. The first is immigration. Sonders is candid about the consequences of sharply reduced labor flows. The demographic profile of the United States was "actually a relatively healthy demographic profile relative to many other parts of the developed world" when immigration was included. Absent that flow, the native-population profile is far less favorable. The labor quality problem is already surfacing: the NFIB's monthly survey of small businesses now ranks quality of labor as the top concern, a reading that had been occupied by inflation and taxes in prior periods. The breakeven rate for payroll growth that does not push unemployment higher has collapsed to somewhere between zero and 30,000 jobs per month. "We really have to stop doing apples-to-apples comparisons on anything that brings in the size of the labor force relative to the past 5 years," she says.
The second headwind is the fiscal position. The 30-year yield is behaving as the market's referendum on US debt sustainability, and Sonders believes the fundamentals are driving it, not sentiment. "You can't jawbone this problem away," she says of the Treasury's recent intervention in the long bond market. The term premium is rising as investors demand higher yields to commit capital for longer durations. Japan is further diversifying away from Treasuries. China has been doing so for 12 years. Foreign private investors, historically large buyers of US Treasuries, now find higher yields available in their home markets. The only durable fix, Sonders argues, requires touching entitlements — a political non-starter that both parties reliably avoid.
Earnings Breadth Versus Earnings Concentration
The title of the episode captures the central tension in markets precisely. The rally is broadening. The earnings growth is not. Sonders makes the distinction forcefully. S&P 500 second-quarter earnings growth came in at more than 50% on a blended basis, far above the 24% consensus estimate at the start of the quarter, and 10 of 11 sectors saw estimate improvements. That is genuine breadth. But the earnings concentration story runs directly beneath it. "Nvidia accounts for 18% of overall S&P 500 year-over-year growth expected in 2026," she says. Add Micron at another 14% and two chip stocks account for 32% of index-level earnings growth. The top 10 earnings contributors represent 65% of total S&P earnings growth.
The risk embedded in that concentration is the gap between sell-side consensus estimates and the buy-side expectations that actually move stocks. Samsung beat published consensus but fell short of what the buy side had priced in. "I think there's a wider spread now than anything we've seen before between the sell-side consensus published and the unpublished buy-side expectation," Sonders warns. "And so that's where I think volatility could kick in." The AI spending boom is real — roughly $1 trillion annualized this year on the AI buildout — but depreciation will eventually catch up. The parabolic acceleration in earnings growth cannot persist indefinitely. "We can't keep setting the bar higher and higher and higher."
The Wealth Effect as Economic Risk
One of the more sobering observations in the conversation concerns the elevated level of household equity exposure. Households' equity holdings as a share of total financial assets are at an all-time high, well above the late 1999 peak. The precedent is not reassuring. The 2001 recession, Sonders argues, was not caused by a credit crunch, a financial system failure, or runaway inflation. "I think the economy just kind of toppled a little bit under the weight of the weakness in the equity market." At current equity exposure levels, the interconnectivity between market weakness and economic contraction may be tighter than at any prior point. The implication for advisors is not alarm, but awareness. "At a point we inevitably go into the next corrective phase, I think we have to maybe look at the connection points to the economy a little bit more closely than we have in the past."
5 Key Takeaways for Advisors and Investors
1. Volatility-based rebalancing outperforms calendar-based rebalancing in an unstable regime. The frequency of rebalancing should be driven by portfolio drift and market volatility, not by the quarter-end date. This mechanically enforces the discipline of adding low and trimming high — without requiring an emotional override.
2. Earnings breadth is real, but earnings concentration remains the dominant risk. Two chip stocks account for nearly a third of expected S&P earnings growth in 2026. Advisors should evaluate client portfolios not just for price concentration, but for earnings concentration, which often runs deeper than the index weights suggest.
3. The stock-bond correlation regime has shifted secularly. Bonds and equities are back in negative price-correlation territory, but the old Great Moderation framework no longer applies. Advisors should incorporate a broader set of diversifiers, including commodities, real assets, and private markets where suitable, rather than relying on the 60/40 alone.
4. The immigration and labor supply shock changes the math on economic indicators. Headline payroll numbers, breakeven employment thresholds, and labor cost comparisons all need to be recalibrated against a structurally smaller and slower-growing labor force. Prior historical benchmarks are not valid reference points.
5. Household wealth concentration in equities creates a new feedback loop between market corrections and economic contractions. With equity exposure at an all-time high share of household financial assets, a sustained drawdown carries greater real-economy spillover risk than in most prior cycles. Portfolio resilience is not just a performance consideration; it is a planning one.
Footnote:
¹ Returns, Excess. "The Rally is Broadening. The Earnings Growth Isn't. Liz Ann Sonders on Which Breaks First." YouTube, 22 Aug. 2026, www.youtube.com/watch?v=wK2AoxmPns4.
