Stock market remains strong despite sluggish bond market, investors warn of a possible market correction
Source: Global Markets Report
Large investment institutions are warning that surging borrowing costs could trigger a stock market correction. While the stock market is booming, the bond market remains in a slump due to persistent high inflation, with the two markets diverging sharply in their trends.
Since early April, the S&P 500 Index, driven by tech stocks, has continued to climb, repeatedly hitting record highs. The recent news of a temporary ceasefire in the Middle East prompted many traders to return to the stock market, fueling a market rebound.
In sharp contrast, government bonds have been subject to heavy selling, and U.S. Treasury yields have climbed to their highest levels in over a year. Investors overwhelmingly believe that with international oil prices holding above $100 per barrel, inflation will be pushed even higher, forcing the Federal Reserve and other central banks to consider further rate hikes.
With the two markets increasingly out of sync, many major fund managers are starting to question whether the stock market can continue to ignore the pessimism in the bond market. In particular, if financing costs continue to rise, the market may start to worry that the valuation of Artificial Intelligence stocks is already overstretched.
Vincent Mortier, Chief Investment Officer at Amundi, said: “A stock market correction is inevitable; it’s only a matter of timing.” He noted that in just six short weeks, market logic, investment perspectives, and capital flows in the stock market have all shifted dramatically, while bond investors remain focused on inflationary pressures brought about by geopolitical events—such as Iran's blockade of the Strait of Hormuz, which has pushed up prices for diesel, gasoline, jet fuel, and other energy products.
Since the initial ceasefire announcement in the Middle East, the wave of global bond sell-offs has intensified, with the U.S. 10-year Treasury yield rising by a cumulative 0.28 percentage points.
The one-year forward inflation swap rate, a measure of long-term inflation expectations, broke above 4% on Monday, reaching its highest level since early 2025.
However, since the ceasefire news broke, the S&P 500 Index has risen by a cumulative 12%, with the market showing little concern that the Middle East conflict will have a long-term economic impact.
Raphaël Thuin, Head of Capital Markets Strategies at Tikehau Capital, pointed out: “The stock market is hitting record highs, credit spreads are tightening, and market optimism is surging, while interest rates and the energy market are pricing in expectations of long-term economic pressure—their trends are completely at odds.”
He added: “In the short term, risk-averse sentiment in the market should be rising; this latest rally has already been exhausted, and a period of adjustment and consolidation in the stock market is inevitable.”
U.S. stock gains have far outpaced those in European markets, with the current bull run increasingly reliant on a handful of Artificial Intelligence-related tech stocks and semiconductor stocks.
Mandy Xu, Head of Global Markets Derivatives Intelligence at Cboe, said that single-stock options trading data show that rate hikes have not dampened the market’s extremely bullish sentiment, and several indicators of speculative fervor are approaching levels not seen since the “meme stock” trading frenzy of 2021.
Europe, being highly dependent on energy imports, has seen its market optimism dampened directly by geopolitical tensions, and the Stoxx Europe 600 Index has yet to return to pre-war levels.
Kamal Bhatia, CEO of Principal Asset Management, stated: “The U.S. stock market is already operating independently of geopolitical factors, which is very puzzling.”
Some investors believe that strong Q1 corporate earnings are enough to offset the uncertainty brought by geopolitical events to the stock market. Giles Parkinson, Head of Equities at Trinity Bridge Asset Management, bluntly noted that the current market gains are actually lagging behind earnings growth, as corporate profits are experiencing explosive growth.
A senior executive in the asset management industry said: “The bond market has already flashed warning signs, suggesting that high inflation and high oil prices could drag down economic growth over the long term, yet the stock market continues its revelry until risks are finally realized.”
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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