A 'Hot' Economy... With a Frozen Housing Market

Earnings season arrives right on time... 3M and Amazon make a data-center deal... Housing starts hit a four-month low... Nearly 15% of home deals canceled... Doc on what higher rates really mean...

Earnings season is arriving at just the right time...

Today was one of the strongest market days we've seen in a while. All the major U.S. indexes were higher, and almost all of the major S&P 500 sectors were up, along with around 400 of the U.S. benchmark-index companies.

So what happened?

After all, the war in Iran isn't over. At least two dozen attacks on tankers have been reported in or near the Strait of Hormuz this month alone.

Meanwhile, the price of diesel in the U.S. is up 70% since the war began, raising costs for all kinds of businesses. And we expect major developments in the war in the weeks ahead that could raise prices even more.

Mercifully for the market, a series of earnings reports was well received today. And strong earnings – reflective of real value produced by businesses – can be the elixir for a string of "bad news." We've seen it over and over again – including today.

First, industrial giant 3M (MMM) beat expectations, raised its full-year guidance, and expanded a data-center deal with Amazon (AMZN). 3M shares gained almost 6% today.

The deal is an interesting meeting of the "real economy," AI, and financial arrangements. Amazon gets the right to buy 3M shares cheaply if it buys a lot of 3M's data-center gear, which is designed to improve fiber connections in data centers.

Meanwhile, defense contractor Northrop Grumman (NOC) beat earnings expectations too, and shares rose more than 4%.

Toymaker Hasbro (HAS) climbed 11% after the firm raised its full-year outlook and doubled its share-buyback target. That's on the heels of steelmaker Cleveland-Cliffs (CLF) jumping 16% yesterday when it reported its best quarter in three years.

We wrote about the high expectations heading into this earnings season a few weeks ago.

Yes, AI names are expected to deliver a high concentration of the expected 30% or so headline growth for the quarter, but year-over-year growth is expected from all 11 major S&P 500 sectors.

That might be just what the market needs, because all is not well everywhere.

For example, the housing market is still frozen...

We've written before about "frozen" activity in the U.S. residential real estate market and the need for more supply.

This morning, the Census Bureau released its monthly data for new homebuilders. In September, housing starts – which mark the beginning of new home construction – fell to an annualized rate of 1.22 million. That was down more than 7% from September 2025.

It's the lowest annualized rate for housing starts since May, and it's part of a larger trend. As our colleague and True Wealth analyst Brett Eversole wrote in the July 14 DailyWealth e-letter...

Unfortunately, homebuilding isn't picking up – it's slowing down. We can see it by looking at housing starts...

The chart below tracks the number of new construction projects on housing units. That number has been trending lower. And it recently dropped to a multiyear low. Take a look...

Earlier this year, the trend seemed to be reversing. Housing starts hit a two-year high in March... But they've collapsed since then. The May figure was the lowest monthly total since 2020.

In previous Digests, we've noted that there's a lack of available housing supply. And that's still true today. According to online realtor Zillow, the U.S. is about 4.7 million homes short of what it needs. And the gap isn't going to close.

Demand is magnifying the supply issue...

As Brett wrote, weak housing-starts data isn't a surprise. Demand for housing has been low "for years." Builders aren't going to start construction on new homes they can't sell.

It's not just new home starts that are down, though...

This morning, the National Association of Realtors ("NAR") released data showing pending home sales – a measure of sales agreed to but not yet closed on – fell 7.3% from August to September and more than 11% from September 2025.

In total, nearly 15% of home sales were canceled in September, according to data from Redfin. That's the highest level since Redfin began tracking the data in 2018 (excluding the COVID-19 pandemic).

There's a simple reason – rising interest rates...

As we've written, the 10-year Treasury yield is the "benchmark" for tons of other interest rates across the economy. Earlier this month, the 10-year yield hit a 24-year high.

Shortly after, the average 30-year fixed mortgage rate hit 7.5% for the first time since 2023.

NAR Chief Economist Lawrence Yun cited "fast-rising mortgage rates" as a big reason behind the drop in pending home sales. In both 2022 – when the Federal Reserve hiked rates at a pace not seen in decades – and now in 2026, we've seen a sustained increase in cancellations.

As long as Treasury yields remain elevated, there's going to be little to no relief for housing affordability.

Housing stocks are suffering...

As we noted in the October 2 Digest, housing stocks have been diverging from the rest of the market...

Take a look at this chart that technical analyst Mark Ungewitter recently posted on X. It compares the PHLX Housing Sector Index ("HGX") with the overall market and makes a concerning comparison to the financial crisis...

In plain English, this two-year-long "divergence" between HGX – a cap-weighted index of companies and businesses associated with the housing industry – and the benchmark S&P 500 is happening now, just as it did from 2005 into 2008.

Since that Digest, HGX fell another 3% to a near-three-year low on October 14. It bounced as yields retreated over the past week, but it remains near those lows today – while the S&P 500 Index is still within 2% of its highs.

This is the reality right now...

All is not perfect under the hood...

Certain stocks and sectors (like real estate) are down significantly, and there has been a "stealth bear market" playing out, as our colleague Whitney Tilson has described.

But at the same time, overall, sentiment remains bullish. Corporate earnings are expected to remain strong... the AI boom keeps booming... and the most basic of trend indicators for U.S. stocks is steady.

The S&P 500 is well above its long-term 200-day moving average (and has been since April), and the index is even above its shorter-term 50-day moving average.

The equal-weight S&P 500 has been relatively weaker lately – down about 7% from its highs in late August through the end of September – but it has climbed 3% in recent weeks and is also above its 200-day moving average. It was up more than 1% today.

We can't predict with certainty what's going to happen next with the war in Iran or the housing market... or when the AI party will end, but we can tell you that the market appears to be looking past risks that were just recently considered more concerning.

What higher rates might really mean...

Higher interest rates might be reflecting a more bullish outlook, as our Dr. David "Doc" Eifrig recently wrote in his monthly issue of Income Intelligence.

Increasingly, signs are pointing to a "hot" economy – one that comes with inflation and high housing costs... and isn't without concerns about U.S. government debt... but is also an environment of growth. As Doc wrote...

When investors expect stronger growth, they may also sell government bonds – for two reasons.

First, higher growth tends to come with a bit of inflation. When there's inflation, bondholders demand higher interest rates to compensate them for lost purchasing power.

But also, if the economy is humming along, there will likely be other assets worth investing in. For instance, if you think the stock market will return 15% a year... you're going to move capital from bonds to stocks until bond yields get high enough to entice you to stick around.

Recently, the economic data has been coming in hot... right in line with the rise in rates.

Doc pointed to the Citigroup Economic Surprise Index, which monitors GDP, employment, inflation, and other economic measures to see if the announced data beats market forecasts. It boils the surprises down to a single index reading.

A reading above zero indicates economic data is beating consensus expectations. Below zero indicates data is missing expectations. As Doc showed, recent data has been getting better at the same time that rates are rising.

And then there's earnings. As Doc said...

On top of that, U.S. corporate earnings for companies in the S&P 500 showed 51% growth year over year in the second quarter. That marked the highest growth since 2021.

According to data from Bloomberg, 86% of companies have beaten expectations so far in 2026.

"Add in a bit of inflation," Doc wrote, "and you can see how higher rates may actually tell a story of a strong economy" rather than one that's at risk. (Income Intelligence subscribers and Alliance members can read the full issue here.)

That doesn't make housing any more affordable right now, and high(er) inflation will likely cause more consequences and trouble down the road, but it doesn't mean the market won't keep going up either. Don't say we didn't warn you.

New 52-week highs (as of 10/19/26): Abercrombie & Fitch (ANF), Alpha Architect 1-3 Month Box Fund (BOXX), Berkshire Hathaway (BRK-B), Hagerty (HGTY), Kimbell Royalty Partners (KRP), Match Group (MTCH), Saturn Oil & Gas (SOIL.TO), Visa (V), and Veeva Systems (VEEV).

Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
October 20, 2026

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