#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 U.S. bonds are heading toward an unavoidable collision. In the context of persistent high inflation and limited Federal Reserve policy space, the scenario of simultaneous rising stock prices and bond yields cannot continue, and the gap between the two will eventually be bridged by a significant pullback in one of them.
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 already significantly deteriorated, while the continued rise in bond yields will serve as a trigger for a substantial correction in the stock market. He believes that only a clear 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 current risk-reward ratio of 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 weak long-term trend.
The Federal Reserve faces a dilemma, and bond market pressure is hard to resolve
The Federal Reserve is currently faced with a difficult choice of whether to raise interest rates, 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 means market expectations for rate hikes have significantly increased. Meanwhile, inflation data continues to exceed target ranges. U.S. core CPI is well above 2%, and the Producer Price Index (PPI) for final demand (excluding energy and food) has soared to 5.25%, with a six-month annualized change 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, and oil prices have shown a strong correlation with U.S. bond yields this year, further limiting the scope 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 importantly, 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, difficult to hide concerns in rally
Although the S&P 500 has hit 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 as the index reached new highs. Currently, only about 55% of the S&P 500 components are trading above their 200-day moving averages, 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 simultaneously." Structurally, this rebound heavily depends on the technology, media, and telecommunications (TMT) sectors. Excluding TMT, the overall U.S. stock market remains well below its February highs. The yields on high-yield (non-energy) corporate bonds in the U.S. are rising, and their credit spreads relative to investment-grade bonds are widening, which are usually early signals of rising stock market risk. The report also specifically notes 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 release anti-inflationary forces at the economic level.
Emerging markets are more vulnerable, and non-U.S. markets may struggle to stand alone
Emerging market equities are in an even more precarious position than U.S. stocks. The report shows that the current rally in emerging markets is more concentrated than in the U.S., and excluding a few large semiconductor producers in Asia (hardware technology), emerging market prices 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 global rebound of risk assets, emerging market currencies against the dollar have not appreciated. The negative 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 the combination of rising oil and food prices with global bond yields will suppress broad demand outside of the tech hardware sector.