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

A rift is emerging on Wall Street: stock investors have been the first to celebrate, as if the US-Iran war never happened, but the bond and commodity markets are telling a completely different, far more cautious story.

The S&P 500 Index and Nasdaq Composite have both hit new all-time highs, but US Treasury yields remain elevated, and oil prices are still far from pre-war levels. Market concerns over lasting damage to Middle Eastern energy infrastructure, along with inflationary pressures constraining the Fed’s room to cut rates, have kept bond investors from joining in the stock market rally.

Analysts point out that, taken together, these market signals suggest that even if the US and Iran ultimately reach a peace agreement, Wall Street professionals do not believe the global economy can simply return to its pre-war trajectory. This backdrop could signal a potential warning for equities, though some views argue that investors are gradually adapting to a high-inflation, high-uncertainty environment, and the stock market may not feel direct pressure in the short term.

Equities rally strongly to record highs

In the early stages of the US-Iran conflict, market sentiment deteriorated rapidly. The S&P 500 Index at one point dropped 8% from its pre-war level, reflecting widespread concern over the uncertainty of the conflict and its potential impact on the global economy.

The turning point came late at night on April 7. After Trump announced a two-week ceasefire agreement, major stock indexes rebounded sharply. Even after Trump imposed a maritime blockade on Iranian ports, the S&P 500 and Nasdaq continued to reach record highs. Last Friday, positive sentiment was further boosted after Iran’s foreign minister declared the Strait of Hormuz “fully open” to commercial vessels, and the two major indices extended their gains again.

Carson Group global macro strategist Sonu Varghese noted that, considering the series of shocks experienced over the past five years, the US seems to have transitioned into a higher-inflation operating range. But he also pointed out that as long as inflation continues to be accompanied by healthy corporate earnings, he remains optimistic about the overall stock market. In the coming week, investors will keep a close eye on progress in US-Iran peace negotiations, as well as earnings reports from UnitedHealth, Tesla, and Lockheed Martin.

Bonds and oil send different signals as rate-cut expectations narrow sharply

In stark contrast to the exuberance in equities, the bond and oil markets are noticeably lagging, reflecting deeper concerns among investors about the outlook for inflation.

The yield on the US benchmark 10-year Treasury closed at 4.244% last Friday, down somewhat from 4.439% at the end of March, but still markedly higher than the pre-war 3.961% level at the end of February. Meanwhile, December US crude futures closed at $72.65 per barrel last Friday, about 8% below the recent peak on March 20, but still up 14% from before the outbreak of war on February 27.

The shift in expectations for rate cuts is even more direct. According to CME Group data, pre-war interest rate futures suggested a 79% probability that traders expected at least two Fed rate cuts this year. Now, that number has plummeted to 11%, and whether the Fed will cut rates at all this year is seen as essentially a coin flip by the market.

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

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

“For the past month and a half our attention has been on the Iran situation, but behind the scenes, the continuous data flow, in my view, supports the case for a more hawkish Fed stance.”

Some investors also highlight that the fiscal deficit is supporting Treasury yields as well. Last year, surging tariff income temporarily eased deficit concerns, but after the Supreme Court ruled most of Trump’s tariffs illegal in February this year, that outlook dimmed, and additional military spending needs due to the Iran war made the situation worse. A widening deficit means the government must issue more bonds to finance itself, which puts pressure on bond prices and pushes yields higher.

Analysts point out that, in this context, some investors have reservations about whether the rally in equities can continue. Brian Jacobsen, chief economic strategist at Annex Wealth Management, said that even before the outbreak of war, he was already concerned about pressure on corporate profit margins, and the Middle East conflict only exacerbated those anxieties.

He noted that higher energy prices have pushed up business input costs, but companies may find it hard to pass these on to consumers whose wallets have already been depleted by elevated prices. “The harm is not just to Middle East infrastructure and capacity, but also to household budgets—consumers have already been paying for weeks of high oil prices.”