#TradFi交易分享挑战 The "conflicting trends" of U.S. stocks and U.S. bonds, who will win next?

#TradFi交易分享挑战 The "conflicting trends" of U.S. stocks and U.S. bonds, who will win next?

U.S. stocks and bonds are heading toward an unavoidable collision. In the context of persistent high inflation and limited Federal Reserve policy space, the simultaneous rise in stock prices and bond yields cannot continue, and the gap between them will eventually be bridged by a significant correction in one of the two.
Recently, BCA Research Chief Strategist Arthur Budaghyan issued a report pointing out that the current rally in the U.S. stock market is highly concentrated in the technology sector, and the internal market structure has clearly deteriorated. Meanwhile, the continued upward movement of bond yields will serve as a trigger for a substantial correction in the stock market. He believes that only a noticeable decline in U.S. stocks can push down bond yields and thus release anti-inflationary forces at the economic level. The report also warns that global stock markets—especially emerging markets—will face significant volatility in the coming months. This judgment indicates that the risk-reward ratio of current global risk assets has greatly worsened. U.S. stocks, emerging market equities, and high-yield credit bonds are all under downward pressure, while the U.S. dollar may remain strong in the short term but is still in a long-term weak trend.

The Federal Reserve faces a dilemma, bond market pressure remains unresolved
The Fed is currently caught in a tough choice between raising interest rates or not, and whichever option it chooses, it is unlikely to be market-friendly. According to the BCA Research report, the yield on the two-year U.S. Treasury has recently risen above the federal funds rate. Historical data shows that over the past 30 years, whenever the two-year yield crosses above the federal funds rate, the Fed has subsequently raised interest rates. This indicates that market expectations for rate hikes have significantly increased. At the same time, inflation data continues to exceed target ranges. The U.S. core CPI is notably above 2%, and the PPI terminal demand (excluding energy and food) has surged to 5.25%, with a six-month annualized change rate reaching 6.6% in April. The report also notes that the crisis in the Strait of Hormuz is unlikely to be resolved in the short term, with upside risks to oil prices. Oil prices and U.S. bond yields have shown a strong correlation this year, further constraining the space for bond yields to fall sharply. The report emphasizes that even if new Fed Chair Kevin Warsh persuades the Federal Open Market Committee to hold off on rate hikes, the Fed’s policy stance and inclination will clearly turn hawkish. More critically, when inflation rises and the central bank remains inactive, markets tend to expect larger future rate hikes, which could lead to further bond sell-offs. "Central banks lag behind the inflation curve, which is bearish for both stocks and bonds," the report states.

Deteriorating internal market structure in stocks, difficult to hide concerns
Despite the S&P 500 reaching new highs, the internal market structure has issued clear warning signals. The report points out that the advance-decline line of the S&P 500 has diverged downward at the time of the index’s new high. Currently, only about 55% of the S&P 500 components are trading above the 200-day moving average, and the implied correlation among S&P 500 components has fallen to its lowest level in history. BCA Research believes that extreme divergence in correlation often foreshadows a collective correction—"Our judgment is that correlation will rebound, and most stocks will decline together." Structurally, this rebound has been heavily reliant on the technology, media, and telecommunications (TMT) sectors. Excluding TMT, the overall U.S. stock market remains well below its February highs. Yields on high-yield (non-energy) corporate bonds are rising, and their credit spreads relative to investment-grade bonds are widening, which are often early signals of rising stock market risk. The report also highlights that U.S. households now hold stocks worth 250% of their disposable income, a record high. High stock prices are stimulating consumer spending and AI capital expenditure, and hyperscale cloud computing companies’ investments in data centers will not stop unless their stock prices fall or capital costs rise. This means only a stock market correction can truly unleash anti-inflationary forces at the economic level.

Emerging markets are more fragile, non-U.S. markets may struggle to stand alone
Emerging market stocks are in an even more precarious position than U.S. stocks. The report shows that the recent rally in emerging markets has been more concentrated than in the U.S. market. Excluding a few large semiconductor producers (hardware tech) in Asia, emerging market stocks remain well below previous highs. Meanwhile, the local currency bond yields in mainstream emerging markets (MSCI Emerging Markets Index excluding China, Korea, and India) have rebounded, which is a negative signal for their stock markets. Over the past six weeks, during the rebound of global risk assets, emerging market currencies against the dollar have not appreciated. The impact of energy and food price shocks on mainstream emerging market economies is much greater than on developed markets. The report judges that earnings prospects for non-TMT sectors in emerging and developed markets are bleak, and rising oil and food prices combined with global bond yield increases will suppress broad demand outside of the tech hardware sector.