A weeklong rebound in stocks showed signs of a pause this week, dragged down after a punishing move higher in Treasury yields.
While investors largely shrugged off Moody’s downgrading U.S. debt earlier in the week, they couldn’t ignore a weak 20-year Treasurys auction, which sent stocks tumbling and longer-term yields surging higher. A bigger hit came Thursday when the House narrowly passed President Trump’s “one big, beautiful bill.” Investors are worried that the bill includes more tax cuts than spending decreases, which threatens to deepen the fiscal deficit by nearly $3 trillion through 2034 – instead of reining it in.
The 30-year Treasury yield hit over 5.041% this week, up from 4.575% a year ago. Meanwhile, the 10-year yield jumped to 4.518% compared to 4.470% a year ago.
That weighed on stocks, as higher yields reduce the value of companies’ future earnings. The S&P 500 logged a decline of 2.6%, while the Nasdaq Composite fell 2.5%.
“The market has weakened, as the overall narrative is now back to the worry about the U.S. deficit,” Fundstrat Head of Data Science Ken Xuan said during the weekly huddle. He didn’t find the auction to be particularly worrying.
Head of Research Tom Lee remains positive about the big picture, focusing instead on how the S&P 500 is off 5.6% from its all-time highs.
“We’ve had a bull run since April, but nobody believes it,” he said in his Macro Minute videos. “Investors we speak to are still looking for reasons for stocks to fall and not reasons for upside.”
Head of Technical Strategy Mark Newton agrees, arguing that technically the market still looks to be in very good shape.
“We’ve seen some meaningful improvement in technical momentum and breadth and participation in technology, which has been helpful,” Newton said.
Stocks have swung wildly this year, with investors hanging onto President Donald Trump’s every word about tariffs. Though the tariffs turmoil had started to make way for some reprieve over the past two weeks, they made a reappearance Friday when the president warned of 50% tariffs on Europe from next month. He also took a stab at Apple, saying the iPhone maker will have to pay them. Apple shares fell 3% Friday.
Lee believes there’s “plenty of fuel” for stocks to reach new records because of two main reasons. First, bitcoin prices hit new highs this week, even as stocks fell. The cryptocurrency’s recent performance indicates that it’s a leading indicator for where stocks are headed. Second, investors are underweight U.S. stocks. As the market rallies, investors will be tempted to buy in, keeping the pullbacks shallow.
Chart of the Week
Head of Research TomLee said this is the third-most hated rally since 2020. The first one was during the brief Covid-19-driven sell-off. The second one came during 2022 when stocks marked a low in October. In order for the bears to turn into bulls, each time, he said, it required stocks to hit fresh all-time highs.
Many who might be fearful of “the R-word” aka. Recession, should see that Comex C +N/A%opper is breaking out today to the highest level since late April. This is a meaningful technical breakout, which should result in Copper pushing back to test March peaks over $5. Moves like this in “Dr. Copper” thought to be a leading indicator for Economic strength, don’t typically happen in recessionary times. ( HG -0.24%_F )
While the Yield curve remains pointed higher and likely won’t reverse too meaningfully ahead of the long weekend, i expect that the bump in yields proves short-lived into next week before the entire curve starts to shift lower. Given the positive trend for the 10’s-2’s curve, this likely brings 2-year yields down more rapidly at first
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