The fourth anniversary of the U.S. stock bull market is approaching. Will the Fed personally end it?
[The fourth anniversary of the U.S. stock bull market is approaching. Will the Federal Reserve personally end it?] The current U.S. stock bull market that started in October 2022 when the Federal Reserve policy shifted to expectations may face a severe test, and the situation in the Middle East is becoming a major obstacle to the market's progress. As the conflict between the United States and Iran continues to escalate, international oil prices rise, and panic over the Federal Reserve's interest rate hikes spreads, the bullish logic of U.S. stocks suddenly becomes fragile. The recent trend of U.S. debt seems to be moving in a dangerous direction.
The current U.S. stock bull market, which will start in October 2022 due to the expected shift in Fed policy, may face a severe test, and the situation in the Middle East is becoming a major obstacle to the market's progress. As the conflict between the United States and Iran continues to escalate, international oil prices rise, and panic over the Federal Reserve's interest rate hikes spreads, the bullish logic of U.S. stocks suddenly becomes fragile. The recent trend of U.S. debt seems to be moving in a dangerous direction. This bull market is dominated by technology stocks, and the fourth anniversary of the bull market is getting closer and closer. The previous market rally spread to industries other than the technology sector, which was once regarded as a positive signal that the economic fundamentals were sound and the bull market cycle was expected to be extended. However, the performance of the S&P 500 equal-weighted index fully proves that once the excess pull of giant technology stocks is excluded, the overall market returns will weaken significantly. Investors must face multiple pressures right now. Brent crude oil is once again approaching the $100 mark; the benchmark 10-year U.S. Treasury yield once stood at 4.70%, just one step away from the May high. Rising yields will push up overall borrowing costs for the U.S. government, businesses and residents. Like high oil prices, high interest rates will inhibit household consumption and drag down the overall economy. Geographical risks further exacerbate market anxiety. U.S. President Trump has threatened to use military force to bomb bridges and power plants in Iran if Iran attacks merchant ships in the Strait of Hormuz. Keith Lerner, chief investment officer at Truist Advisory Services, said: "Oil prices are driving interest rates upward simultaneously. The superposition of the two major variables has completely disrupted the Federal Reserve's policy path." Data from the Chicago Mercantile Exchange (CME) Federal Reserve Watch Tool showed that the probability of the Federal Reserve raising interest rates this month once reached 33.7%, and the market began to trade the possibility of raising interest rates in September. Lerner believes that although the current probability of raising interest rates is not extremely high, market expectations are evolving in a direction that is negative for the stock market. Federal Reserve Chairman Kevin Warsh made it clear at the press conference after the interest rate meeting in June that the market should no longer expect the Fed to release clear policy signals in advance. Currently, Wall Street has reached a consensus: every interest rate meeting in the future has the possibility of adjusting interest rates, and it is no longer a safe window for "fixing no interest rate increases". Rising interest rates will suppress technology stocks with high valuations. Lerner said: "Our baseline judgment is still that the long-term bull market trend has not been destroyed." However, he also warned that market volatility will significantly intensify after July, and various risks that have gradually subsided will once again become concentrated, and major AI cloud giants need to hand over expected financial reports to realize valuation support. Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said: "The entire market is focused on the main line of AI and sector rotation, but interest rate trends continue to be negative for the stock market and the real economy, and there is currently no simple and effective solution in sight. We are already deep in the quagmire of a war with Iran, but there is no clear exit strategy." U.S. debt faces critical moment In July, the U.S. Treasury bond market, which has a scale of more than $30 trillion, suffered another sell-off and hit a worrying key point. The 30-year U.S. Treasury yield has remained above 5% for 14 consecutive trading days, setting a record for the longest streak since the 2007 subprime mortgage crisis. Dustin Reed, chief fixed-income strategist at McKenzie Investments, said inflation is the biggest negative factor for long-term bonds. "If inflation remains high for a long time, investors will inevitably demand higher yields as compensation for risk." Jamie Dimon, CEO of JPMorgan Chase, the largest financial institution in the United States, also recently stated that he will not buy U.S. bonds, "I don't see any room for upside." The drop in oil prices in June pushed U.S. bond yields down briefly from their highs. However, major cloud giants in the AI computing power competition continue to issue long-term corporate bonds on a large scale, which has recently further intensified supply pressure on the government bond market. The BondCliQ data chart shows that the existing debt of the six major technology companies of Microsoft, Amazon, Alphabet, NVIDIA, Meta, and Oracle has approached US$500 billion in 2026. The huge expansion of AI corporate bonds has provided bond investors with a large number of alternatives with yields better than 30-year U.S. bonds.
The market generally believes that 5% itself is not a special magic number, but the round number easily attracts market attention and will not fundamentally change the current situation of continued debt issuance and financing in the United States. However, this interest rate is the benchmark for pricing of 30-year fixed mortgage loans. The current mortgage interest rate is 6.55%. This level has significantly suppressed residents' refinancing needs. What the market is worried about is that unlike 2023 and the first half of this year, it will be difficult for the current 30-year U.S. bond yield to fall back quickly after it reaches 5%. The long-term rise in Treasury bond yields has significantly increased the interest payment costs of the United States' huge debt and fiscal deficit. Alexander Payne, head of mortgage, agency debt and volatility strategy at Vanguard, said that the current sell-off in government bonds was not caused by a single trigger, but market funds did not aggressively hunt for dips. Because of the high U.S. fiscal deficit and the expectation of large-scale capital expenditures for global AI infrastructure, "investors will have plenty of opportunities to deploy long-term bonds at higher yields in the future, which is a unique feature of the current market." It is worth mentioning that this spring, the total debt-to-GDP ratio in the United States exceeded 100%. At the same time, overseas purchases of U.S. debt have continued to weaken in recent decades, but the scale of U.S. Treasury bond issuance continues to expand. Reid said that if the 30-year U.S. Treasury yield hits 5.25%, the U.S. Treasury may feel pressure. "The Ministry of Finance never wants long-term yields to soar out of control. High long-term interest rates will directly impact stock market valuations and bring downside risks to the equity market."
The market generally believes that 5% itself is not a special magic number, but the round number easily attracts market attention and will not fundamentally change the current situation of continued debt issuance and financing in the United States. However, this interest rate is the benchmark for pricing of 30-year fixed mortgage loans. The current mortgage interest rate is 6.55%. This level has significantly suppressed residents' refinancing needs. What the market is worried about is that unlike 2023 and the first half of this year, it will be difficult for the current 30-year U.S. bond yield to fall back quickly after it reaches 5%. The long-term rise in Treasury bond yields has significantly increased the interest payment costs of the United States' huge debt and fiscal deficit. Alexander Payne, head of mortgage, agency debt and volatility strategy at Vanguard, said that the current sell-off in government bonds was not caused by a single trigger, but market funds did not aggressively hunt for dips. Because of the high U.S. fiscal deficit and the expectation of large-scale capital expenditures for global AI infrastructure, "investors will have plenty of opportunities to deploy long-term bonds at higher yields in the future, which is a unique feature of the current market." It is worth mentioning that this spring, the total debt-to-GDP ratio in the United States exceeded 100%. At the same time, overseas purchases of U.S. debt have continued to weaken in recent decades, but the scale of U.S. Treasury bond issuance continues to expand. Reid said that if the 30-year U.S. Treasury yield hits 5.25%, the U.S. Treasury may feel pressure. "The Ministry of Finance never wants long-term yields to soar out of control. High long-term interest rates will directly impact stock market valuations and bring downside risks to the equity market."