"With the 'contradictory movements' of U.S. stocks and U.S. bonds, which will come out on top?"

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US stocks and US bonds are headed for an unavoidable collision. With inflation remaining high and the Federal Reserve's policy options limited, the simultaneous rise in stock prices and bond yields is unsustainable, and the gap between the two will ultimately be closed by a significant correction in one side.

Recently, BCA Research Chief Strategist Arthur Budaghyan issued a report pointing out that the current surge in the US stock market is highly concentrated in the technology sector, the internal structure of the market has clearly deteriorated, and the continued rise in bond yields will become the fuse that triggers a substantial correction in the stock market.

He believes that only a significant drop in US stocks can push down bond yields and thereby unleash economic anti-inflationary forces. The report also warns that global stock markets — especially emerging markets — will face significant volatility in the coming months.

This judgment means that the risk-return profile of global risk assets has markedly worsened. US stocks, emerging market equities, and high-yield credit bonds are all under downward pressure, while the US dollar may remain strong in the short term, but will stay weak in the longer term.

The Fed in a Dilemma, Bond Market Pressure Unresolved

The Federal Reserve currently faces a difficult choice of whether to raise interest rates, and regardless of the option, it is hard to see it as favorable for the market.

According to the BCA Research report, the yield on the US two-year Treasury has recently climbed above the federal funds rate. Historical data shows that over the past 30 years, whenever the two-year yield crosses above the federal funds rate, the Fed has subsequently raised rates. This means expectations for rate hikes have risen sharply.

Meanwhile, inflation data continues to exceed target ranges. US core CPI is notably higher than 2%, PPI for final demand (excluding energy and food) has soared to 5.25%, and its six-month annualized change hit 6.6% in April. The report also points out the Hormuz Strait crisis is unlikely to be resolved soon, oil price risks are biased upward, and oil prices have been highly correlated with US Treasury yields this year, further limiting the room for yields to fall significantly.

The report emphasizes that even if new Fed Chair Kevin Warsh persuades the FOMC not to raise rates for now, the Fed's policy stance and tendency will clearly turn more hawkish. More importantly, when inflation rises and the central bank is slow to act, markets usually expect larger rate hikes ahead, which may lead to further bond sell-offs. “A central bank lagging the inflation curve spells trouble for both stocks and bonds,” reads the report.

Market Structure Deteriorates, Rally Masks Risks

Though the S&P 500 has hit new highs, obvious warning signs are emerging within the market.

The report notes that the S&P 500's advance-decline line has diverged downward even as the index sets new highs. Currently, only about 55% of S&P 500 components trade above their 200-day moving average, and implied correlation between S&P 500 stocks has dropped to historic lows. BCA Research believes that extreme divergence in correlations often foreshadows a collective pullback—“Our view is that correlations will rebound, and most stocks will fall simultaneously.”

Structurally, this rebound is highly dependent on the Technology, Media, and Telecommunications (TMT) sector. Without TMT, overall US stocks are still well below their February peaks. US high-yield (non-energy) corporate bond yields are rising and their spreads over investment-grade bonds are widening, which typically signals rising risks in the stock market.

The report especially notes that US households’ holdings in equities have reached 250% of disposable income, a record high. High stock prices are stimulating consumer and AI capital spending, and hyperscale cloud computing firms will not stop investing in data centers unless their stock prices fall or capital costs rise. This means only a market correction can truly unleash anti-inflationary forces at the economic level.

Emerging Markets More Fragile, Non-US Equities Vulnerable

Emerging market equities are even more precarious than US stocks.

The report shows that this round of emerging market gains are even more concentrated than US stocks. Excluding a handful of major semiconductor manufacturers (hardware tech) in Asia, emerging market equity prices overall remain well below previous highs.

Meanwhile, yields on mainstream emerging market local currency bonds (MSCI EM Index excluding China, South Korea, and India) are rebounding, which is a negative signal for their stock markets. Over the past six weeks of global risk asset rallies, mainstream emerging market currencies have failed to appreciate against the US dollar.

The negative impact of energy and food price shocks on mainstream emerging markets is much greater than that on developed markets. The report judges that profits outlook for emerging and developed market stocks outside TMT is worrying. Rising oil and food prices, combined with global bond yield increases, will squeeze overall demand in areas beyond tech hardware.

Risk Warnings and DisclaimersThe market has risks; investment requires caution. This article does not constitute personal investment advice nor does it take into account the specific investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investments made based on this are at one’s own risk. ```