The "contradictory trend" of US stocks and US bonds, who will win next?

The collision between US stocks and US bonds is inevitable. In the context of persistent high inflation and limited policy space for the Federal Reserve, it is difficult to sustain the simultaneous rise of stock prices and bond yields, and the gap between the two will eventually be bridged by a significant pullback of one of them. Recently, Arthur Budaghyan, Chief Strategist of BCA Research, released a report pointing out that the current rally in the US stock market is highly concentrated in the technology sector, and the market's internal structure has deteriorated significantly. The continued rise of bond yields will be the trigger for a substantial pullback in the stock market. He predicts that only a noticeable decline in US stocks can push down bond yields, thereby releasing anti-inflationary forces in the economy. The report also warns that global stock markets, especially emerging markets, will face significant volatility in the coming months. This assessment indicates that the risk-return ratio of global risk assets has deteriorated significantly. US stocks, emerging market stocks, and high-yield corporate bonds are facing downward pressure, while the US dollar may remain strong in the short term, but is still in a weak trend in the medium to long term. The Federal Reserve is in a dilemma, and the pressure on the bond market is difficult to resolve. The Federal Reserve is currently facing a difficult decision on whether or not to raise interest rates, and regardless of the choice, it is not good news for the market. According to the BCA Research report, the yield on the two-year US Treasury bond has recently risen above the federal funds rate. Historical data shows that over the past 30 years, whenever the two-year yield has risen above the federal funds rate, the Federal Reserve has followed by hiking interest rates. This means that market expectations for rate hikes have significantly increased. At the same time, inflation data continues to exceed the target range. The US core CPI is significantly higher than 2%, and PPI for final demand (excluding energy and food) has surged to 5.25%, with a 6-month annualized change rate reaching 6.6% in April. The report also points out that the crisis in the Strait of Hormuz is unlikely to be resolved in the short term, with significant upside risks in oil prices. Since oil prices have been strongly correlated with US bond yields so far this year, this further compresses the space for a significant decline in bond yields. The report emphasizes that even if the new Federal Reserve Chairman Kevin Warsh convinces the FOMC to temporarily refrain from raising interest rates, the Fed's policy stance and leanings will shift clearly towards hawkish. More importantly, when inflation rises and central banks hesitate to act, the market often expects larger rate hikes in the future, which could lead to further selling of bonds. "Central banks lagging behind the inflation curve is negative for both stocks and bonds," the report said. The internal structure of the stock market has deteriorated, and concerns are difficult to hide behind the rally. Despite the S&P 500 reaching new highs, the internal structure of the market has sent clear warning signals. The report points out that the advance-decline line of the S&P 500 has diverged downward at the time the index reached a new high. Currently, only about 55% of S&P 500 component stocks are trading above the 200-day moving average, and the implied correlation between S&P 500 component stocks has dropped to its lowest level in history. BCA Research believes that extreme differentiation in correlations often indicates a forthcoming collective decline - "our judgment is that correlations will rise, and most stocks will decline simultaneously." Structurally, this rebound relies heavily on the technology, media, and telecommunications (TMT) sectors. Excluding TMT, the overall US stock market is still well below the February high. US high-yield (non-energy) corporate bond yields are rising, and their credit spreads relative to investment-grade bonds are widening, which is usually a leading signal of increasing risk in the stock market. The report also specifically points out that US households' holdings of stocks have reached 250% of disposable income, a historical record. High stock prices are stimulating consumer spending and AI capital expenditures, and hyperscale cloud computing companies' investments in data centers will not stop unless their stock prices fall or capital costs rise. This implies that only a stock market decline can truly release anti-inflationary forces in the economy. Emerging markets are more vulnerable, and non-US stock markets cannot thrive on their own. The situation for emerging market stocks is more precarious than that of US stocks. The report shows that the recent rise in emerging market stocks is more concentrated than that of US stocks, and excluding a few large semiconductor manufacturers in Asia (hardware technology), the overall price of emerging market stocks is still well below previous highs. At the same time, yields on mainstream emerging market (MSCI Emerging Markets Index excluding China, South Korea, and India) local currency bonds have rebounded, which is an unfavorable signal for their stock markets. During the global rebound of risk assets in the past six weeks, mainstream emerging market currencies against the US dollar have not appreciated. The negative impact of energy and food price shocks on the economies of mainstream emerging markets is much greater than on developed markets. The report concludes that the profit prospects for non-TMT sector emerging market and developed market stocks are worrying, and the rise in oil and food prices combined with the increase in global bond yields will suppress demand in areas outside of technology hardware. This article is translated from "Wall Street News", by Zhao Ying, edited by GMTEight: Li Cheng.