Sizzling Rally in US Stocks Leaves Them Pricey Compared to Bonds

Stocks

Bond

Summary:

A sharp rally in U.S. stocks has made them expensive relative to bonds, as the equity risk premium nears 20-year lows. With high Treasury yields and uncertain catalysts, investors turn cautious.

Traders who hung on during this year’s tariff-fueled rollercoaster ride in stocks are facing a conundrum: Bonds may offer more attractive returns in coming years, according to one widely tracked measure.

The equity risk premium, which investors use to determine the difference between expected returns on equities and US Treasuries, is hovering around its lowest point since 2002, data from Bloomberg Intelligence showed. That suggests stocks are more expensive relative to bonds than they have been for most of the last two decades, according to Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper.

Calculated by subtracting the S&P 500 Index's (^SPX) earnings yield from the 10-year Treasuries rate, the gauge helps investors decide where to allocate their cash. The case for owning equities becomes less compelling if bonds can earn nearly as much as stocks but with reduced risk.

After the big recovery in stocks since April, the readout is fairly gloomy for equities: The S&P 500 (^GSPC) has averaged a 12-month return of only 2.5% over the past three decades when the risk premium has stood around current levels, according to data compiled by investment research firm CFRA. That compares to an average annual return of 8.5% for the period.

Sizzling Rally in US Stocks Leaves Them Pricey Compared to Bonds_1

“Whenever you see equity risk premium slump this much, it historically tells us that stocks are becoming less attractive,” said Timothy Chubb, chief investment officer at Girard, a wealth advisory firm backed by Univest. “After a massive rally over the past two months, this could take some air out of the recent rebound.”

With the S&P 500 within 2% of a record following a breathtaking surge from the edge of a bear market, investors are seeking fresh catalysts to justify buying stocks at current levels. While a brighter outlook on global trade, robust corporate earnings and resilient economic data have driven that rebound, those factors appear to be largely priced in.

That may be a reason for the comparatively listless trading in equities of late. The S&P 500 hasn’t seen a move exceeding 0.6% in either direction for 10 of the last 11 sessions through Wednesday — the longest such stretch since early December, according to data compiled by Bloomberg.

“We know what the rules of the game are now for the trade war, and tariff optimism is no longer a floor for shares with things looking pricey again,” said Scott Ladner, chief investment officer at Horizon Investment.

Higher Yields

Meanwhile, Treasury yields stand near their highest levels in decades. Worries over US fiscal spending are expected to keep borrowing costs high for the foreseeable future, though several months of weaker-than-expected inflation have bolstered the case for the Federal Reserve to cut interest rates.

Not all periods with a negative or low equity risk premium have coincided with poor stock returns. The measure was negative for two long stretches in the post-World War II era, from October 1968 to October 1973, and from September 1980 to June 2002, BI data show. During the first stretch, stocks gained 1.1% annually, but they surged an annualized 10% in the latter.

At the same time, worries over the US fiscal position have dented the appeal of Treasuries, especially longer-dated maturities. DoubleLine Capital’s Jeffrey Gundlach was the latest to sound a warning, saying on Wednesday that America’s debt burden and interest expense have become “untenable” and could drive investors out of dollar-based assets.

Rich Valuations

Pricey stock valuations — including those of the so-called Magnificent Seven tech megacaps — are one key reason for the low equity risk premium.

Excluding the so-called Magnificent Seven stocks including Nvidia Corp. (NVDA), Microsoft Corp. (MSFT) and Meta Platforms Inc. (META) brings the forward earnings yield up to 5.1%, from its current level of 3.62%, BI data shows. Still, that’s just 0.7 percentage point above the 10-year yield.

“The outlook for stocks will ultimately be driven by trade and Fed policy in the coming months,” said Casper, of Bloomberg Intelligence. “The Fed will be a pivotal catalyst for any further upside ahead since monetary easing is historically good for equity gains. But investors need clarity.”

Source: Bloomberg

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Forex

The dollar neared a 2025 low on Thursday, while stocks eased from record highs, as a cocktail of rising Middle East tensions and concern over the fragility of a trade truce between Washington and Beijing drew investors into safe-haven assets.

Separately, a report on U.S. consumer inflation on Wednesday showed overall price pressures remained contained in May, largely due to declines in the cost of gasoline, cars and housing. But most economists expect inflation to pick up as the impact of U.S. tariffs begins to bite.

The dollar, which has lost around 10% in value against a basket of currencies this year, skimmed its lowest levels since late April, which in turn, marked its lowest level in three years.

Global stocks took a breather from the almost-unbroken rally that has run since early April, leaving the MSCI All-Country World index (.MIWD00000PUS) , down 0.1%, just below Wednesday's all-time high.

In Europe, the STOXX 600 (.STOXX) , fell 0.8%, led mostly by airlines and autos, given the strength in the oil price, while futures on the S&P 500 and Nasdaq fell 0.5%.

The U.S. administration on Wednesday said U.S. personnel were being moved out of the Middle East due to heightened security risks in the region, which briefly drove oil prices up by 4% before they receded.

"(A flare-up in tensions) is a significant tail risk, but I don't think it is anybody's baseline forecasts. So it's something to watch if there is a real escalation there, then markets will take fright and that would have ramifications for the oil price," Daiwa Capital economist Chris Scicluna said.

Iran, for its part, said it will not abandon its right to uranium enrichment, a senior Iranian official told Reuters on Thursday, adding that a "friendly" regional country had alerted Tehran over a potential military strike by Israel.

Classic safe-haven assets got a lift. The Swiss franc and the Japanese yen strengthened, pushing the dollar down by around 0.6% against both currencies, while gold held firm at $3,350 an ounce.

The sense of relief stemming from a positive conclusion to U.S.-China trade talks earlier this week, which President Donald Trump said was a "great deal with China", evaporated by Thursday.

RED, WHITE AND BLUE LETTERS

Adding yet another dose of uncertainty in the markets, Trump said the U.S. would send out letters in one to two weeks outlining the terms of trade deals to dozens of other countries, which they could embrace or reject.

"Markets may have no choice but to respond to Trump's tariff threat — even if it's just posturing to bring others to the table. The gap between 'risk-on' positioning and real-world risks has stretched too far," said Charu Chanana, chief investment strategist at Saxobank.

Trump's erratic tariff policies have roiled global markets this year, prompting hordes of investors to exit U.S. assets, especially the dollar, as they worried about rising prices and slowing economic growth.

The euro , one of the beneficiaries of the dollar's decline, touched a seven-week high and was last at $1.1535.

U.S. Treasuries also rallied in price, pushing yields down 1.5 basis points to below 4.4%, while two-year yields , which are more sensitive to inflation and interest-rate expectations, eased 1.6 bps to 3.93%.

Later in the day, the focus will be on a producer inflation report as some of the components feed into the Fed's preferred inflation gauge - the Personal Consumption Expenditure Index.

Wednesday's consumer index kept alive the prospect of the Federal Reserve cutting rates by a quarter point, but only in September, as policymakers assess how tariffs work their way through the real economy.

"I suspect it's probably going to be a combination of the two. Therefore it makes sense for the Fed to wait and see what happens rather than rushing into a rate cut," AMP Capital's head of investment strategy and chief economist Shane Oliver said.

Oil, which has fallen by 20% in the last year, eased by 1% to $69.07 a barrel, but remained near two-month highs, adding another moving part to the outlook for interest rates.

source : reuters

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Glendon

Economic

Forex

The Swiss National Bank (SNB) is likely to cut its policy rate by 50 basis points next week, bringing it back into negative territory for the first time since 2022, according to a new forecast from Capital Economics.

The SNB reduced its policy rate by 25 basis points to 0.25% at its last meeting, but inflation has since fallen into negative territory in May, significantly below the central bank’s March forecast of 0.3% for the second quarter. Core inflation dropped to just 0.5% in May, suggesting underlying price pressures are weaker than previously anticipated.

The Swiss franc has appreciated approximately 4% on a trade-weighted basis since the SNB’s March meeting, following what Capital Economics refers to as Trump’s "Liberation Day." According to an SNB working paper, this currency strength could reduce inflation by 0.5% annually over the next three years.

Capital Economics notes the risks are skewed toward the SNB undershooting its price stability target of 0-2% inflation. While there may be a short-term boost to demand as businesses front-run potential tariffs, particularly in the pharmaceutical sector, U.S. trade policy will likely have a negative impact on Swiss demand over the medium term.

If Switzerland secures a trade deal with the United States, it may include reduced barriers to agricultural trade, which could further weigh on inflation given the high level of Swiss food prices, according to the research firm.

Source: Investing

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Commodity

Oil Pulls Back After Rally Stalls Near Technical Resistance

Crude oil futures turned sharply lower Thursday, giving up earlier gains as traders took profits and reassessed risk ahead of critical geopolitical developments. West Texas Intermediate (WTI) spiked to $69.29 in early trading but reversed sharply, setting up a possible closing price reversal top—a technical warning sign that suggests a near-term pullback may be underway.

Wednesday’s breakout above the 200-day moving average at $66.43 marked a bullish shift, turning that level into key support. However, the rally failed to challenge the April 2 peak of $71.17, stalling instead at resistance around $68.21. Traders may now look for a retest of the 200-day average as bulls regroup.

Middle East Risk Premium Fades as Traders Eye U.S.-Iran Talks

Prices initially climbed on Wednesday after reports confirmed the U.S. would partially evacuate diplomatic personnel from Iraq and Bahrain due to heightened regional tensions. President Trump emphasized the potential danger in the region, reaffirming U.S. opposition to Iran’s nuclear ambitions.

Yet by Thursday, the rally faded as traders weighed the possibility of de-escalation. The U.S. and Iran are scheduled to hold high-level talks on Sunday in Oman. U.S. Special Envoy Steve Witkoff will meet Iranian Foreign Minister Abbas Araghchi to discuss a potential deal on Iran’s nuclear activities.

Strait of Hormuz in Focus for OPEC Watchers

Oil traders remain focused on the Strait of Hormuz, a vital chokepoint for nearly 20% of global oil flows. Any disruption there could have a major supply impact. Global Risk Management analyst Arne Rasmussen warned that a closure would be a “nightmare” scenario for the oil market.

Britain’s maritime agency has issued cautionary guidance to vessels operating in the Gulf, Gulf of Oman, and the Strait of Hormuz, citing risk of military escalation. The situation is especially critical given Iraq’s role as the second-largest crude producer in OPEC.

Iranian Threats and U.N. Violation Add to Market Jitters

Iran’s Defense Minister has threatened to strike U.S. bases if talks fail, while President Trump continues to hint at possible military action. Meanwhile, the U.N. nuclear watchdog declared Iran in violation of non-proliferation rules, its first such ruling in nearly 20 years, raising the prospect of U.N. Security Council involvement.

Despite this, some traders believe the weekend talks may calm tensions. OANDA analyst Kelvin Wong noted that recent price gains hit key resistance levels, triggering some to book profits and reduce exposure.

Oil Prices Forecast: Bearish Near-Term as Market Lacks Catalyst

WTI briefly broke above $69, but the rally stalled and reversed sharply, signaling a potential short-term top. The lack of follow-through, combined with technical rejection near $68.21 and evident profit-taking, points to downside risk.

While the 200-day moving average around $66.43 now serves as key support, traders will be watching closely for headlines out of Sunday’s U.S.-Iran talks for direction. In the absence of a supply shock or a sustained breakout, the near-term oil prices forecast remains cautiously bearish.

source : fxempire

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Michelle

Economic

Forex

The dollar extended its decline as worries over US tariffs increased after President Donald Trump said he would notify trading partners soon of unilateral levies.

The Bloomberg Dollar Spot Index slid as much as 0.6% to the lowest level since July 2023 on Thursday, extending the previous day’s drop spurred by softer US inflation data. The euro rose to its strongest since November 2021.

Traders will be monitoring US producer-price data due later Thursday for confirmation of subdued pressures. Some of its components feed into core personal consumption expenditure, the Federal Reserve’s preferred measure of inflation. They will also watch an auction of 30-year Treasuries after yields surged last month on fiscal concerns.

“Dollar weakness has much more room to run,” said Vasileios Gkionakis, senior economist and strategist at Aviva Investors. He added the greenback’s weakness despite rising yields show eroding investor confidence in US assets.

The dollar’s decline spilled into the currency volatility market, reinforcing the inverse correlation between the greenback and hedging costs recently. Demand was particularly pronounced in the one-week tenor, which captures the Fed’s June 18 policy meeting.

What Bloomberg’s Strategists Say...

“Trader pricing still favors more Federal Reserve interest rate cuts, although the precise timing flips around depending on the prevailing investor mood. But what is consistent is the US dollar ploughing a path to the downside as FX trader convictions firm.”

— Mark Cranfield, Markets Live Strategist, Singapore

Currency traders will also be watching the upcoming Group-of-Seven summit for any trade negotiation developments.

“We are watching the G-7 summit closely for pending trade deals between the US and its key trading partners (e.g., Mexico and Canada),” said Alex Loo, macro strategist at TD Securities in Singapore. “Leaks this week may boost sentiment, especially the likes of Canadian dollar and Mexican peso.”

Source: Yahoo Finance

To stay updated on all economic events of today, please check out our Economic calendar

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Stocks

China–U.S. Trade War

US stock futures pulled back on Thursday ahead of a fresh batch of inflation data, as investors continued to puzzle over President Trump's ever-evolving trade policy.

Dow Jones Industrial Average futures (YM=F) fell roughly 0.6%, or over 200 points, while S&P 500 futures (ES=F) dropped about 0.4%. Contracts on the tech-heavy Nasdaq 100 (NQ=F) moved 0.3% lower.

Stocks are staying downbeat after the S&P 500 (^GSPC) snapped this week's run of wins, as investors add growing tensions in the Middle East to worries over the fragility of the US-China trade detente.

But the spotlight is on the May reading on wholesale inflation due later, after its consumer counterpart showed an easing in price pressures in the wake of Trump's "reciprocal" tariff hikes in April.

Further hints that tariffs are sparing inflation could put the Federal Reserve in a tight spot ahead of its policy meeting next week. Bets on interest-rate cuts this year have mounted, but analysts expect officials to maintain their wait-and-see approach to economic data and policy decisions.

While investor focus is shifting back to the Fed and away from trade war, Wall Street is following the latest twists and turns in the hunt for clarity around Trump's tariff policy.

US trading partners will get letters within a week or two to set their tariff rates, Trump reiterated on Wednesday, saying they "can take it or leave it." Meanwhile, Treasury Secretary Scott Bessent told Congress it's "highly likely" that countries in trade negotiations with the US will see an extension of the 90-day tariff pause, currently set to expire July 9.

source : finance.yahoo

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Stocks

China–U.S. Trade War

U.S. stock futures suggest a lackluster start to trading on Wall Street on Thursday, as investors eye recent U.S.-China trade talks and a bevy of fresh inflation data. President Donald Trump has suggested that he is open to possibly extending a 90-day delay to his punishing "reciprocal" tariffs beyond a deadline early next month. Elsewhere, markets are awaiting May producer price figures, while Oracle (NYSE:ORCL) raises its full-year revenue target, sending shares in the cloud-computing group spiking in extended hours trading.

Futures drop

U.S. stock futures pointed lower, with traders gauging a relatively benign consumer price reading and signs of détente in recent trade tensions between the United States and China.

By 03:37 ET (07:37 GMT), the Dow futures contract had slipped by 106 points, or 0.3%, S&P 500 futures had fallen by 13 points, or 0.2%, and Nasdaq 100 futures had declined by 48 points, or 0.2%.

The benchmark S&P 500 and tech-heavy Nasdaq Composite both retreated on Wednesday, while the blue-chip Dow Jones Industrial Average was unchanged. Investors seemed to greet a slower-than-anticipated measure of consumer price growth in May in muted fashion, as worries persisted over the potential impact of Trump’s tariff agenda.

Markets seemed to also be cautiously assessing a framework agreement between Washington and Beijing to resume their fragile trade truce. Trump called the deal "great," although analysts flagged that the announcement was short of many concrete details and possibly left the door open for a future flare-up in the spat between the world’s two largest economies.

Sentiment was dented as well after media reports suggested that the U.S. is preparing for a partial evacuation of its embassy in Iran. An official from Tehran previously said that strikes on U.S. bases in the region would be carried out if ongoing nuclear talks collapse and a conflict emerges with the U.S.

Trump on trade talks

Meanwhile, Trump has hinted at a willingness to possibly extend a delay to his elevated "reciprocal" levies on most countries, saying that negotiations on bespoke trade deals were ongoing with 15 countries.

Speaking to reporters on Wednesday, Trump claimed that the White House was "rocking in terms of deals," adding that "quite a few countries [...] want to make a deal with us."

But he stressed that an extension to a postponement of his heightened duties beyond the current deadline in early July is likely not a "necessity."

Trump added that the U.S. plans to send out letters to dozens of nations in the coming weeks that will set out the terms of trade deals, flagging that these countries will then have to choose whether to "take it, or [...] leave it."

The president paused the implementation of his broadest tariffs in April, in a bid to give negotiators time to hammer out a series of agreements. However, with the 90-day halt set to end on July 8, the U.S. has just one trade deal agreed with Britain and 17 others are being discussed.

PPI ahead

The focus is now turning to a data point due out later today which tracks growth in U.S. producer prices, as markets remain wary of any indications that Trump’s tariffs could be re-fueling inflationary pressures.

Economists anticipated that the producer price index for final demand edged up by 0.2% month-over-month in May, after it fell by 0.5% in the prior month. In the twelve months to May, the measure is seen speeding up to 2.6% from 2.4%.

In April, wholesale services prices slipped by 0.7% -- the biggest fall since the government first began to monitor the numbers in December 2009. Prices for hotel and motel rooms decreased in particular, reflecting a retreat in tourist travel which analysts noted was potentially sparked by a backlash to Trump’s policies since returning to office.

Crucially, accommodations, airline fares, and portfolio management fees make up some of the components that factor into an inflation gauge preferred by Federal Reserve interest-rate setters.

On Wednesday, a separate Labor Department data set showed that consumer prices increased at a cooler-than-projected pace in May, thanks in large part to cheaper gasoline prices counterbalancing an uptick in rent costs.

Oracle earnings

Shares in Oracle surged in extended hours trading after the cloud-computing group lifted its annual revenue growth target and highlighted solid demand from clients aiming to harness artificial intelligence.

Oracle CEO Safra Catz told investors in a post-earnings call on Wednesday that total revenue in its 2026 fiscal year is expected to be at least $67 billion, implying yearly growth of roughly 16.7%.

The company had previously guided for an increase of 15%.

Catz noted that its annual total cloud growth rate, which includes "applications plus infrastructure," will also rise to over 40% from 24% in the 2025 fiscal year, bolstered mostly by solid returns from its Oracle Cloud Infrastructure solution business and clients’ need to support AI workloads.

Analysts at Vital Knowledge called the prospects for Oracle’s growth "amazing," but flagged that "meeting that demand is eating up a lot of cash" and contributing to an elevated projection for annual capital expenditures.

Oil dips

Oil prices slipped, handing back some of the previous session’s sharp gains as the U.S. authorised voluntary departures for military dependents in the Middle East amid rising tensions with Iran.

At 03:42 ET, Brent futures dropped 1.3% to $68.89 a barrel and U.S. West Texas Intermediate crude futures fell 1.2% to $67.33 a barrel.

Both contracts surged over 4% on Wednesday during a turbulent trading session, supported by the progress in U.S.-China trade talks, which has helped reduce demand concerns, with free-flowing trade expected to boost global economic activity and thus crude demand.

Wednesday’s spike reflects heightened geopolitical risk, as investors feared any conflict could disrupt shipping routes or oil infrastructure across the Gulf.