Why are US stocks remaining unmoved despite the escalating impact of the US debt crisis?

The interest rate shock continues to escalate, yet US stocks remain unmoved—this rare divergence is drawing widespread market attention. The 10-year US Treasury yield has risen by approximately 57 basis points since August 28th, bond volatility remains high, and oil prices are also exerting additional macroeconomic pressure. However, the S&P 500 index has essentially stood still, and the VIX index has remained low, suggesting that the traditional linkage between interest rates and the stock market appears to have failed.

The core logic supporting the resilience of US stocks may lie in the strong performance of earnings fundamentals. Goldman Sachs data shows that the S&P 500 index has risen 13% year-to-date, but the market consensus on earnings per share (EPS) for the next 12 months has jumped 29%. This means that the forward price-to-earnings ratio has actually compressed from 23 times a year ago to 19 times currently. Valuation has not expanded, but rather earnings have played the main supporting role.

Meanwhile, the reversal of yen carry trades is seen as a significant structural factor behind the global sell-off in the bond market. As the Bank of Japan (BOJ) continues to raise interest rates and Japanese bond yields rise, the arbitrage logic of borrowing low-interest yen and allocating to high-yield overseas assets is crumbling. This force, which once provided additional demand for global sovereign debt, may now be shifting.

Interest rates and the stock market have diverged to extreme levels.

The gap between the S&P 500 index and the 10-year Treasury yield (inverted) has widened to a level that is historically difficult to ignore.

According to LSEG Workspace data, historically, similar interest rate fluctuations have typically had a substantial impact on the stock market, but the transmission mechanism appears to have broken down in this instance. The 10-year yield has risen by approximately 57 basis points since the end of August, yet US stocks have shown unusual resilience.

The "cork in the water" logic that has been circulating in the market—that the longer the stock market is suppressed, the greater the elasticity once interest rates fall—is still working effectively. How the suppressed upward momentum will be released if yields eventually reverse is one of the most noteworthy potential variables in the current market.

Bond volatility is high, while the stock market remains indifferent.

Not only are the absolute levels of yields alarming, but the gap between bond volatility and stock volatility is equally striking.

The MOVE index (which measures implied volatility in the bond market) remains high, while the VIX index, although it has rebounded from its recent lows, remains within a relatively calm range. This extreme divergence between the two indicates that panic in the bond market has completely failed to spread to the stock market.

This is yet another macroeconomic signal that the US stock market has been deliberately ignoring recently. The bond market is "crying out," but the stock market is turning a deaf ear.

Profit expansion compresses valuations, providing a fundamental shield.

The resilience of US stocks may not be driven by sentiment alone, but rather by fundamental factors.

Goldman Sachs points out that the S&P 500 has risen 13% this year, but the market consensus forecast for EPS growth over the next 12 months is as high as 29%. The result of this difference is that the forward price-to-earnings ratio has actually compressed from 23 times a year ago to about 19 times currently.

This data indicates that the current stock market rally is not a product of valuation bubbles, but rather driven by substantial profit growth. From this perspective, the fact that the stock market can maintain a sideways trend or even a slight increase against the backdrop of such severe macroeconomic shocks can itself be interpreted as a sign of strength.

Privorotsky also pointed out that no matter how optimistic one is about the prospects of artificial intelligence, such optimism will have a very limited impact on the market until energy and interest rate issues are resolved.

A reversal in yen carry trades could fuel a global bond market sell-off.

The global sell-off in the bond market may have an underestimated structural root cause: the large-scale unwinding of yen carry trades.

Ed Yardeni argues that for many years, ultra-low-cost yen financing has enabled investors to borrow yen and allocate funds to various high-yield assets globally, including sovereign bonds. This mechanism has provided additional demand support for the sovereign debt market against the backdrop of continuously expanding government fiscal deficits.

However, with the Bank of Japan continuing to raise interest rates and Japanese bond yields rising, the arbitrage opportunity of borrowing low-interest yen to hold foreign bonds is narrowing. Arbitrage trades are being forced to close out, foreign bonds are being sold off, and capital is being encouraged to flow back to Japan.

Yardeni believes this may be one of the key reasons why this round of bond market sell-offs has shown a global spread: the forces that were once structural buyers of sovereign debt are now turning into sellers at a time when fiscal supply remains enormous, and the pressure on the bond market is difficult to alleviate under the combined pressure of these two factors.

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