William Lee, Chief Economist at Global Economic Advisors, is calling out a dangerous disconnect in the US market. The S&P 500 hits record highs, yet the US 10-year Treasury yield sits at 5.3%. That is not a minor blip. It is a signal. And according to Lee, the real economy is bleeding while the AI trade soars. The 30-year mortgage rate has crossed 7.4%. No recovery in sight. No relief for consumers buying autos. The housing and construction sectors are stagnant.
Lee argues the Fed is looking at the wrong numbers. Headline growth is masking deep structural fractures. Interest-sensitive sectors are suffering under elevated bond yields. Small businesses borrowing for inventory or non-AI expansion are feeling the pinch. The equity owners—roughly 15% of the US population—are reaping the rewards. Everyone else, working in construction outside data centers or in housing, is struggling. The distribution of policy impact is becoming dicey.
The capital demand for AI is immense. It is propping up the broader economy and keeping equity markets resilient despite the yield spike. But that creates a false sense of confidence. Lee warns the Fed could be lured into thinking all is well. A further rate hike would widen the gap. The AI sector would remain untouched. The rest of the economy would tighten further. It is a policy trap.
Then there is the midterm election factor. Four weeks away. The betting markets are split, but Lee sees a low-conviction forecast. Democrats likely take the House. Republicans keep the Senate. A divided government is what the market wants. Inaction allows the private sector to drive growth. The AI trade will rise regardless. But strip out the AI names from the S&P 500, and 80% of the remaining stocks are underwater. The October volatility is there. It is just hidden by the market cap weight of the tech giants.