U.S. Stocks and Bond Market Experience 'Severe Divergence,' Wall Street Warns of Growing Pullback Risk: Don't Easily Anticipate the Peak

May 19 — As U.S. Treasury yields continue to climb, major Wall Street asset management firms are sounding the alarm: the growing divergence between the stock market and bond market is intensifying, and the market faces a potential pullback risk. Since April, AI and tech stocks have propelled the S&P 500 to a string of record highs. At the same time, U.S. bonds have faced persistent selling pressure, pushing the 10-year U.S. Treasury yield to a one-year peak. Market concerns center on fears that Middle East tensions and elevated oil prices could rekindle inflation, forcing the Federal Reserve to hold interest rates at high levels for longer. Vincent Mortier, chief investment officer at Eastspring Investments, said, “A stock market pullback is only a matter of time—not whether it will happen.” He noted that market sentiment, prevailing narratives, and investor positioning have flipped completely in just six weeks. Data confirms the gap: Since ceasefire reports emerged, the S&P 500 has rallied 12%. Meanwhile, the one-year inflation swap rate has topped 4% for the first time since 2025, signaling the bond market is repricing inflation risks. Raphaël Thuin, chief strategist at Tikehau Capital, pointed to a stark, irreconcilable divide right now: Stocks keep hitting fresh highs, credit spreads are tightening, and investor sentiment is wildly bullish—yet energy and rate markets are pricing in long-term economic shocks. Not all market players are bearish, though. Some firms argue corporate earnings still underpin stocks. Giles Parkinson, stock director at Trinity Bridge, said current corporate earnings are “breaking out,” meaning the logic behind the market rally isn’t over yet. A senior asset management executive summed up the dynamic neatly: The bond market has flashed a “yellow warning” over high oil prices and sticky inflation, while stocks keep betting on optimism. “The market will party until a real disaster hits,” he added.