Markets defied gravity this week. The S&P 500 stretched its winning streak to eight consecutive weeks, its longest run since 2023. The Dow pushed to fresh all-time highs. Perhaps more notable than the gains themselves was that it happened in spite of the rising bond yields. Yields climbed toward levels that have historically made investors nervous, yet stocks pressed on and continued to grind higher.
Investors have spent much of the year navigating a growing wall of worry that includes elevated oil prices, persistent inflation concerns, geopolitical uncertainty, and shifting expectations for Federal Reserve policy. It should be more than enough to knock the market down and keep it there. Yet earnings strength, AI investment, and solid economic growth continue to provide enough fuel to keep the broader trend pointed upward.
The rally is also becoming somewhat healthier beneath the surface if you can believe it. Small-cap and value stocks outperformed large-cap growth shares this week, and the equal-weight S&P 500 outpaced the traditional market-cap weighted index. In simple terms, more stocks are participating in the recent advance. Bull markets love a strong crowd, and this broader participation is a constructive sign for continued growth as we exit earnings season.
Yield to oncoming inflation
The biggest story that should be dominating the headlines is the rise in Treasury yields and the reasons behind it. Since March, the 10-year Treasury yield has climbed back toward the upper end of its recent range.
Part of that move reflects encouraging developments. Economic activity remains stronger than many expected, consumers continue spending, businesses are investing aggressively in AI, and productivity trends appear to be improving. Unfortunately, the market rarely delivers only good news.
Recent purchasing manager surveys showed modest growth overall, but rising input costs and selling prices stood out. This is a rapid rise, rivaling the pace back in 2022, during the last energy shock. Job losses were attributed directly to rising costs and worsening demand.
Source: Chris Williamson, S&P Global via Daily Chartbook
Consumer inflation expectations also rose, and the Federal Reserve meeting minutes reinforced concerns that policymakers may need to respond more forcefully to inflation risks. Several officials indicated additional policy tightening could still be considered if inflation does not cool. Governor Christopher Waller spoke in Germany on Friday and shared surprisingly hawkish remarks.
Federal Reserve meeting minutes analysis: The Prospect of a Grueling Hike
Bond markets spent the week buffeted by crosscurrents. Treasury yields rose early before retreating later as hopes for progress surrounding Iran negotiations helped ease oil prices and inflation concerns. Despite the stock market strength this week, investors appear increasingly sensitive to the connection between oil prices, inflation expectations, and bond yields.
The chain reaction has become fairly straightforward. Higher oil prices raise inflation concerns, which lift yields, which in turn make stocks work harder for their gains.
Crucially, this still does not look like a repeat of 2022. Monetary policy is far more restrictive, and fiscal support is much less aggressive than during the post-pandemic period. The Federal Reserve has enough flexibility to be patient, but new data for May and June inflation will be monitored closely. The American people haven’t forgotten the inflation of 2022, and they won’t forgive another slow reaction to runaway prices.
We’ve earned it
More than 470 S&P 500 companies have reported results, with both revenue and earnings growth continuing to exceed expectations. AI-driven technology and semiconductor firms remain major contributors, although software stocks also showed renewed strength this week. Earnings growth remains one of the strongest supports for stocks and has helped offset concerns around rates and geopolitics.
Source: FactSet
What this means for investors and what’s next
The coming week could provide another important test for market momentum. Investors will focus on the PCE inflation report, updated GDP estimates, and a few technology and retail earnings reports.
Developments around Iran remain a critical factor, as movements in oil prices continue to ripple through bond markets and broader investor sentiment. While rising yields deserve attention, the pressure hasn’t been enough to hold stocks back. If both yields and stocks continue to rise in tandem, it is only a matter of time until one snaps lower. Without the benefit of weekly upside earnings surprises, my guess is stocks will blink first.
Economic Reports
Earnings Releases
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