U.S. stocks have reached record highs, but the U.S. bond market remains cautious.

```

A rift is appearing on Wall Street: stock investors have already begun celebrating, as if the US-Iran war never happened, but the bond and commodity markets are telling a very different and much more cautious story.

The S&P 500 and the Nasdaq Composite Index have both set new record highs, but US Treasury yields remain elevated and oil prices are still far from prewar levels. Worries that Middle Eastern energy infrastructure could suffer lasting damage, and concerns that inflationary pressure will constrain the Fed's ability to cut rates, have kept bond investors from joining the stock market's exuberance.

Analysts point out that, overall, these market signals indicate that even if the US and Iran eventually reach a peace deal, Wall Street professionals do not believe the global economy can simply return to its prewar track. This backdrop could present a potential warning for the stock market, but some believe that investors have gradually adapted to this kind of high inflation and high uncertainty environment, and the stock market might not face near-term pressure because of it.

Stocks surge, hit record highs

At the onset of the US-Iran conflict, market sentiment deteriorated rapidly. The S&P 500 at one point dropped 8% from prewar levels, reflecting broad concerns about the uncertainty of the conflict and its possible impact on the global economy.

The turning point came late at night on April 7. After Trump announced a two-week ceasefire deal, major stock indexes quickly rebounded. Since then, even with Trump implementing a maritime blockade on Iranian ports, the S&P 500 and Nasdaq both successively hit record highs. Last Friday, Iran’s foreign minister announced that the Strait of Hormuz was “completely open” to commercial ships, lifting market sentiment further, with both indexes extending their rally.

Carson Group’s global macro strategist Sonu Varghese said that given the series of shocks experienced over the past five years, the US now appears to be operating in a higher inflation range. But he also noted that as long as inflation is accompanied by healthy corporate profits, he remains upbeat on stocks . In the coming week, investors will closely watch the progress of US-Iran peace talks, as well as the earnings releases of UnitedHealth, Tesla, and Lockheed Martin.

Bonds and oil send different signals, rate cut expectations drop sharply

In sharp contrast to the buoyant stock market, the bond and oil markets have lagged significantly, reflecting deeper investor concerns about inflation prospects.

The US benchmark 10-year Treasury yield closed last Friday at 4.244%, down from 4.439% at the end of March, but still well above the prewar level of 3.961% at the end of February. Meanwhile, December-delivered crude oil futures closed last Friday at $72.65 per barrel, about 8% lower than the recent March 20 high, but still up 14% from February 27 before the war.

The shift in rate cut expectations is even more pronounced. According to CME Group data, before the war, rate futures showed traders believed there was a 79% chance the Fed would cut rates at least twice this year; now, that probability has plunged to 11%, and whether the Fed will cut rates at all this year has become a 50-50 toss-up.

Inflation data are equally concerning. The Fed’s preferred core inflation gauge — the core personal consumption expenditures price index — is expected to top 3% when released later this month, up from 2.8% in October last year.

Blake Gwinn, head of US rates strategy at RBC Capital Markets, said:

"For more than a month, our attention has been focused on Iran, but behind that, the data we've been receiving continues to support a more hawkish stance from the Fed, in my view."

Some investors also note that the fiscal deficit issue is also supporting higher Treasury yields. Last year, surging tariff revenues eased deficit concerns for a time, but this February, after the Supreme Court ruled that most of Trump’s tariffs were illegal, the outlook darkened, and the extra military spending prompted by the Iran war has only made matters worse. A widening deficit means the government must issue more bonds to raise funds, which puts pressure on bond prices and pushes up yields.

Analysts note that, in this context, some investors are skeptical about stocks’ ability to sustain their rally. Brian Jacobsen, chief economist at Annex Wealth Management, said he was worried about corporate profit margins even before the war broke out, and the Middle East conflict has only deepened this concern.

He noted that rising energy prices are pushing up companies’ input costs, but with consumers already depleted by high prices, firms may find it hard to pass these costs on. “The damage is not just to infrastructure and capacity in the Middle East, but also to household budgets — consumers have already paid the price for weeks of high oil prices.”

Risk Warning and DisclaimerThe market carries risks and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article fit their own circumstances. You are solely responsible for any investment decisions made based on this information. ```