Good morning,
Equities spent most of last week as a picture of resilience. Bonds around the world, however, began to crack under the weight of rising inflation concerns. By Friday, that divergence became increasingly difficult to ignore. The steady climb in equities — powered by AI enthusiasm, resilient earnings, and a U.S. consumer that continues to spend despite elevated energy prices — finally showed signs of fatigue. Weakness in technology shares and small caps on Friday cemented a negative week for every major equity index except the S&P 500, which managed a fractional gain of +0.13% for the week.
The damage in fixed income was far more pronounced. The U.S. 2-Year Treasury yield rose +19bps to 4.07%, the 10-Year climbed +24bps to 4.59%, and the 30-Year added +19bps to 5.12%. Those levels — 4.0%, 4.5%, and 5.0% respectively — are psychologically and financially important thresholds for the global bond market. These were unusually large moves for fixed income instruments, much of it occurring on Friday, and ultimately too much for equities to continue ignoring.
The inflation narrative is beginning to take hold. There is still no peace agreement with Iran, and the closure of the Strait of Hormuz remains unresolved. Betting markets now imply only roughly even odds of a nuclear agreement with Iran by year-end. From that flank, there is currently little for markets to celebrate.
Aside from watching the White House for signs of its next steps regarding Iran, the market’s attention this week turns squarely to Nvidia earnings after Wednesday’s close. Expectations are elevated following the stock’s recent advance, though results should remain strong given the positive read-through from other semiconductor companies and continued increases in hyperscaler CapEx budgets.
One challenge with being among the final major companies to report earnings each season is the potential lack of near-term follow-through catalysts afterward. Beyond Nvidia, there is relatively little scheduled to reinforce the AI infrastructure narrative until Broadcom reports on June 6th — effectively the last major earnings catalyst for the group. That dynamic raises the possibility of a classic “sell-the-news” reaction Thursday morning.
The larger question now is whether Friday’s weakness marked the beginning of a broader correction. After six blistering weeks higher for equities — and equally blistering moves in bond yields, though not the good kind — some digestion would hardly be surprising. One day does not make a trend, but the odds now appear better than even that additional selling pressure lies ahead and that a correction of some dimension unfolds.
Be well,
Mike