Inflation alarm bell ringing loudly! Global bond market selloff affecting risky assets, US stock market AI bull market may face interest rate backlash.

The US stock market saw its largest drop since March last Friday, with the main reasons being the global bond market sell-off, the surge in long-term bond yields, and the inflation worries sparked by the continuous rise in oil prices due to the ongoing conflict in the Middle East. Data shows that last Friday, the S&P 500 index recorded its largest single-day drop since March; the global bond market sell-off pushed the yield on the US 10-year Treasury bond above 4.5%, the yield on the Japanese 30-year government bond rose to 4%, and the UK long-term government bond yield reached its highest level in 28 years. In the oil market, WTI crude oil rose 4% to over $105 per barrel, while Brent crude closed above $109 per barrel. Against the backdrop of no clear signs of an end to the conflict in the Middle East, investors entering the new week are increasingly affected by its key economic consequences - rising global interest rates and inflation risks. As of the time of writing, the yield on the US 10-year Treasury bond has risen above 4.6%. Reports from Iran indicate that there are still significant differences between the conflicting parties in the negotiation to end the war. The reports suggest that the US "has not made any substantial concessions" but is trying to "obtain concessions it failed to achieve during the war, which will lead to a stalemate in the negotiations." US President Trump hinted on social media last Sunday that his patience was wearing thin: "Time is running out for Iran, theyd better act fast, otherwise theyll have nothing. Time is of the essence!" According to US media reports, Trump is expected to hold a meeting with his national security team in the White House situation room on May 19 to discuss plans to restart military action against Iran. The deadlock between the US and Iran has led to the continued closure of the Strait of Hormuz. Sam Stovall, Chief Investment Strategist at CFRA, said, "Like a domino effect, the continued closure of the Strait of Hormuz will continue to exert upward pressure on oil prices, which is likely to further push up inflation data and lead to rising bond yields." "This combination will weaken consumer and investor confidence and could trigger a correction in the recent stock price surge." For risk assets, last Fridays market performance was a rare setback in a near-unilateral upward trend since April. Previously, although the war pushed up price pressures, strong corporate profits and economic expansion continued to drive risk assets such as stocks, cryptocurrencies, and credit markets significantly higher. However, now, the market is increasingly speculating that the actual closure of the Strait of Hormuz could exacerbate energy supply disruptions and further fuel inflation. Data released last week showed that, due to the continuous rise in gasoline prices driven by the Middle East conflict and the surge in grocery costs, US inflation continues to accelerate, with the Consumer Price Index (CPI) rising 3.8% year-on-year in April, the fastest pace since 2023; the Producer Price Index (PPI) for April surged 1.4% month-on-month, the largest monthly increase since March 2022, far exceeding the market expectation of 0.5%; the year-on-year increase reached 6.0%, the highest level since December 2022, significantly surpassing the market expectation of 4.8%. These data indicate that inflation pressure in the US is rising, prompting traders to increase their bets on a Fed rate hike. Currently, the CME Group's "FedWatch" tool shows that the market has largely ruled out the possibility of a rate cut by the Fed before the end of the year. Instead, the market expects a 49% probability that the Fed will raise rates by at least 25 basis points by December. Jeffrey Gundlach, CEO of DoubleLine Capital, bluntly stated that investors should not expect the Fed to cut rates at the next policy meeting. He said, "The market was expecting two rate cuts this year, but inflation doesn't give a break." "In my view, when the 2-year Treasury yield is close to 50 basis points higher than the federal funds rate, the Fed simply cannot cut rates." Due to concerns about tight energy supply, corporate purchases of finished products on a global scale may overshadow the war effects reflected in business surveys in the coming week. Although Purchasing Managers' Indices (PMIs) from Australia to the US in May are expected to show continued economic expansion, the key question is whether these figures reflect economic resilience or merely signify manufacturers' last gasp before widespread energy shocks hit. Scott Ladner, Chief Investment Officer at Horizon Investments, said, "Eventually, the Middle East conflict will end, and commodity prices will return to pre-war levels." "However, with the end of the US earnings season approaching, investors' focus is returning to the macro level, where the primary tone is higher interest rates - an enduring headwind for the stock market." US Stock Valuations and Technical Indicators Both Flashing Red Lights It is worth noting that as US Treasury yields rise, two market signals that are significant enough to be recorded in financial history simultaneously flashed red lights last week, indicating that US stocks are in an extremely rare state of dual extremes in valuation and technology. On the valuation side, the Shiller cyclically adjusted price-to-earnings ratio (CAPE Ratio) developed by Nobel laureate Robert Shiller has soared to 42.32, less than 5% below the peak during the dot-com bubble in 2000. The warning significance of CAPE ratio at high levels in historical context is self-evident. Historically, the CAPE ratio has typically fluctuated around a long-term average of about 17. The current reading of 42.32 implies that the valuation of the US stock market has surpassed most periods before the global financial crisis, the post-pandemic rebound period, and even the majority of the dot-com bubble frenzy in 1999. Historically, this indicator has only reached similar or higher extreme levels in two periods: before the Great Depression in 1929 and before the collapse of the dot-com bubble in 2000. Every major collapse began with a sharp rise in the Shiller Price-to-Earnings ratio. Simultaneously rising along with valuation is market concentration. Currently, the top ten components of the S&P 500 index account for over 40% of total market value, nearly 50% higher than the level of about 27% during the dot-com bubble in 2000. Tech giants such as Apple, Microsoft, and NVIDIA, which are leading the indexs gains, contribute most of the index's rise, displaying a structural feature of high dependence on a few individual stocks. In a January outlook report, Goldman Sachs' new Chief US Equity Strategist Ben Snider pointed out that the combination of "high valuation, extreme concentration, and strong recent returns" in the US stock market is structurally very similar to several previous overheated market periods in the 20th century. On the technical side, a rare technical warning signal called the "Hindenburg Omen" flashed on both the New York Stock Exchange and the Nasdaq last week, prompting intense debate among traders on whether the prosperity beneath the surface of US stocks is becoming increasingly fragile. Historically, the Hindenburg Omen has appeared multiple times before major market corrections, including the 1987 stock market crash, the dot-com bubble bursting, and the onset of the 2008 financial crisis. In February 2026, the signal triggered three times within 6 days, and over the past six months, there have been 8 signal clusters, leading analysts to warn that "clusters often herald the formation of market tops." Entering May, the internal structure of the market further deteriorated. According to the latest data, while the S&P 500 index frequently hits new highs, the divergence between the number of new highs and new lows at the New York Stock Exchange continues to widen, with funds highly concentrated in a few large-cap stocks and overall market participation significantly declining. Goldman Sachs' Chief US Equity Strategist team warned in a recent report that the current surge in the US stock market is highly concentrated in a few giant tech stocks, and market breadth has fallen to its lowest point since the dot-com bubble era, with downside risks continuing to accumulate. However, traders also caution that the signal itself may be prone to false alarms, as a single trigger does not guarantee an impending market collapse. Technical analysts typically look for further confirmation signals in the following days to assess the validity of the omen. Both signals are significant enough to be taken seriously, but more importantly, they both point to the same underlying issue - that beneath the seemingly continuous new highs of stock indices, the scope of participation in the rise is likely sharply narrowing, with the celebration of a few giants masking the weakness of the majority of stocks. RBC, Bank of America Sound Alarm: US Stocks Could be Hit Hard If 10-Year Treasury Yields Break 5%, June Could be an "Escape" Window As concerns about escalating inflation pressures bolster expectations of tighter monetary policy by the Federal Reserve, US Treasury yields are on the rise, displaying strong momentum under the narrative of artificial intelligence (AI) and presenting a crucial test for the US stock market. Both RBC Capital Markets and Bank of America on Wall Street have issued warnings. Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, raised the target for US stocks but also warned that if the yield on the 10-year US Treasury bond rises to 5%, the bullish stance on US stocks will face challenges - at this level, US Treasury yields typically push down valuation levels. According to reports, Calvasina raised the 12-month target for the S&P 500 index from 7,750 points to 7,900 points. This new target is based on an earnings per share of $329, a 4.5% yield on the 10-year US Treasury bond, a 3.3% US inflation rate, and the assumption that the Fed will hold rates steady. She also added that if the inflation rate rises to 3.8%, the yield on the 10-year US Treasury bond rises to 5%, and the Fed is forced to raise rates, then her target for the S&P 500 index would be lowered to 7,400 points. Calvasina also stated that based on her model of $329 earnings per share for the S&P 500 index in early 2027, if corporate profits decline by 5% year-on-year, the index would fall to 6,300 points. She pointed out that a 5% yield on the 10-year US Treasury bond "seems likely to unsettle the market," and "these calculations suggest that the true support for US stock market valuation comes from the earnings story, and the pressure endured by interest rates and price-to-earnings ratios is the headwind the market must face". However, she also pointed out that as companies increasingly turn to long-term debt financing and reduce floating rates and short-term credits, the sensitivity of US corporate profits to fluctuations in the yield on the 10-year US Treasury bond is decreasing. She also noted that corporate net debt levels are decreasing over time. Meanwhile, Michael Hartnett, Chief Investment Strategist at Bank of America, believes that due to the increasing influx of investors and rising inflation risks, US stocks could see a round of profit-taking in early June. Hartnett stated, The process of investors chasing stocks and technology stocks across the board is likely to be completed in the coming weeks, so early June is an ideal time for moderate profit-taking. Hartnett and his team pointed out that price pressures in the US are spreading widely, from energy and transportation to rents, while US stock prices continue to hit new historical highs. They also noted that a series of events in June, including the OPEC meeting, the World Cup, the G7 summit, and the first Federal Open Market Committee (FOMC) meeting led by Powell at the Fed, could be market catalysts, making June an ideal time window for reducing positions. Hartnett and his team believe that unless the rapid decline in CPI momentum of 0.4% in recent months continues, the year-on-year CPI increase in the US will likely exceed 5% before the midterm elections in November, which is not favorable for the stock market. Hartnett stated that when the year-on-year CPI increase surpasses 4%, "risk assets will begin to become restless." According to data from the past 100 years, once the year-on-year CPI increase exceeds this level, the S&P 500 index typically falls an average of 4% in the following three months, with an average drop of 7% over six months.