Stocks Rise, Yields Roar

Quick Take

Equities rallied sharply since April’s bottom and in May as easing trade tensions, strong earnings, and global monetary support renewed investor confidence across domestic and international markets.

Bond markets remained volatile, reflecting persistent concerns over U.S. fiscal health and delayed rate cuts, highlighting the risks of policy uncertainty.

Since bottoming on April 8th amid tariff-induced uncertainty, the stock market has mounted a robust rally, fueled by renewed investor confidence and resilient corporate earnings. In contrast, the bond market has remained volatile, burdened by concerns over U.S. fiscal sustainability and uncertain monetary policy. 

Stock Markets: A Broad-Based, Global Rally

Stocks worldwide have rebounded sharply following the early-April tariff shock. The S&P 500 surged 6.3% in May - its strongest monthly gain since late 2023 - while international stocks rose 4.8%. Key drivers included:

• Easing Trade Tensions: A significant catalyst continues to be the de-escalation of trade tensions between the U.S. and China. The 90-day tariff pause, reducing tariffs from 125% to 10% (total tariff on China of 30%), along with new trade frameworks like the agreement with the United Kingdom, suggests tariffs are being used as negotiating levers rather than definitive policy measures. 

• Strong Corporate Earnings: Results from the leading U.S. technology firms fueled optimism across developed markets. Nvidia, emblematic of the artificial intelligence wave, reported a 69% year-over-year revenue increase. Many of the largest, top-tier tech firms continue to exhibit extraordinary pricing power and otherworldly earnings. 

• Favorable Economic Data: Central banks in Europe and parts of Asia began easing monetary policy in May. Notably, the ECB and Bank of England signaled imminent rate cuts, which boosted investor confidence and equity valuations abroad.  

Bond Markets: Uncertainty, Higher Yields

In May, the U.S. bond market experienced heightened volatility, with yields rising across various maturities. Several key forces contributed:   

• Rising Treasury Yields Amid Fiscal Concerns: Yields on U.S. Treasuries increased notably in May. This upward pressure was largely driven by investor apprehension over expanding federal deficits and the potential inflationary impact of new fiscal policies, including the proposed tax and spending bill projected to add at least $2.5 trillion to the national debt over the next decade. 

• Inflation Dynamics and Federal Reserve Policy: While inflation showed signs of easing, core prices remained above the Fed’s target. Other data, such as like strong wage growth and resilient consumer spending, suggested the economy wasn’t slowing fast enough to warrant immediate Fed cuts. This caused markets to recalibrate rate cut expectations – lifting yields.  

• Bank of Japan’s Policy Shift: The Bank of Japan ended its yield curve control policy, allowing domestic rates to rise and prompting Japanese investors, historically major holders of U.S. Treasuries, to repatriate capital. This reduced foreign demand placed additional upward pressure on yields.

What It All Means

Markets are navigating a complex landscape: equity investors are embracing growth and innovation amid improving global conditions, while bond markets remain wary of fiscal strain and policy ambiguity. This divergence illustrates a broader tension -optimism about near-term growth versus caution about long-term sustainability.

So far this year, financial markets have offered a humbling reminder of the value of staying invested through periods of volatility. While it is natural to feel apprehensive amid geopolitical and economic uncertainty, long-term investment success more often rewards discipline over reactivity. The sharp stock rebound from early April unfolded swiftly and without a definitive signal, leaving those who waited for clarity at risk of missing a meaningful portion of the recovery.

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