U.S. stocks have surged 16% in two months: this has only happened four times in history, with the most recent being before the 1987 crash!

The strong rebound in US stocks over the past two months is triggering historical warnings. The S&P 500 index rose a cumulative 16% from April to May, a gain seen only four times since World War II. Three of these occurred during recoveries after recessions, while the only non-recession precedent was in the months leading up to the 1987 "Black Monday" crash.

Deutsche Bank macro strategist Henry Allen points out that the current rally is not happening in the context of a post-recession recovery, making historical comparisons particularly stark. Meanwhile, credit spreads remain at historical lows, but signs of consumer pressure are accumulating, Fed rate hike expectations are rising, and the disconnect between sovereign bond markets and stocks is widening.

Multiple risk factors are stacking up, causing tail risk in the market to concentrate unusually. Henry Allen wrote in his report, "The distribution of tail risks is abnormally prominent now, both at the geopolitical and market levels."

Historical precedents are rare, only one in a non-recession context

The S&P 500’s two-month gain from April to May reached 16%, which has only four precedents since World War II.

Three of these occurred as strong rebounds after recessions: April-May 2020 during the post-pandemic recovery, March-April 2009 after the global financial crisis, and January-February 1975 following the first oil crisis correction.

The fourth was January-February 1987. At that time, only a few months remained until "Black Monday" in October — when the S&P 500 plunged 20% in a single day.

Henry Allen emphasizes that the current rally has fundamental support, including enthusiasm for artificial intelligence and strong economic data, but "the speed of the rise has already broken all recent precedents." In an economy that has not come out of recession, a rebound at this speed has never ended well in history.

Additionally, the S&P 500 is on track to achieve a fourth consecutive year of double-digit gains, a record not seen since the late 1990s.

Credit market is overly optimistic, consumer stress signals ignored

The stock market’s strength has spread to the credit market. Credit spreads in both the US and Europe are narrower than before the US-Iran conflict, indicating high tolerance for risk.

However, warning signs from the consumer side are accumulating. The US savings rate in April was only 2.6%, a low seen only twice before: in a particular month of 2022 (when excess savings from the pandemic were being depleted), and on the eve of the global financial crisis. Meanwhile, the University of Michigan’s consumer confidence index hit its lowest level since records began in 1952.

The monetary policy environment is also tightening. The European Central Bank is widely expected to raise rates this month, and markets are increasingly betting on Fed rate hikes in 2026—April US PCE inflation was 3.8% year-on-year, supporting this expectation.

Henry Allen points out that historically, hawkish Fed stances have coincided with widening credit spreads, as seen in 2022, late 2018, and 2015-2016. The current calm in the credit markets is a clear divergence from this historical pattern.

The bond market under pressure, disconnect with stocks widening

While stocks and credit markets show high immunity to geopolitical risks, the sovereign bond market has taken a significantly different path.

Over the past month, the yield on the 10-year US Treasury has closely tracked oil price volatility, clearly decoupling from other asset classes. In mid-May, sovereign bond yields hit multi-year highs: the 30-year US Treasury yield rose to 5.18%, the highest since 2007; the 10-year German Bund yield climbed to 3.19%, the highest since 2011.

At the time, stocks were within reach of historical highs, while bond yields were at levels not seen in over a decade. This divergence has yet to show signs of narrowing.

Henry Allen believes that the bond market prices inflation and fiscal risk more directly, making it more sensitive to geopolitical shocks. The persistent gap between stock and bond markets itself reflects the fragility of today’s markets.

Oil prices unexpectedly steady, acting as a pillar for risk assets

The blockade of the Strait of Hormuz has lasted far longer than initial market expectations, but oil prices have responded surprisingly calmly, which partly explains the resilience of risk assets.

The US-Iran conflict broke out on February 28, with the White House initially expecting actions to last 4-6 weeks. However, as of now, the Strait of Hormuz remains blocked. According to Polymarket data, the probability of resuming normal navigation by the end of June has plunged from about 80% in mid-April to 22% now.

Still, the oil futures curve remains relatively stable. Two weeks after the conflict erupted, Brent crude six-month futures closed at $85.66 per barrel on March 13; on June 1 the contract was still around $84.88, virtually unchanged.

Henry Allen notes that, precisely because the oil futures curve has not moved sharply higher, investors have not priced in severe stagflation risks, avoiding larger-scale sell-offs in risk assets. He warns, however, that if the Strait of Hormuz blockade persists, it remains uncertain whether this support can hold.

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