What's next for stocks? Look to bonds
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Over the last few months, stocks have gotten very touchy about rising Treasury yields, with relatively modest increases associated with large stock market moves.
Why it matters: If Wednesday's Consumer Price Index report shows higher-than-expected inflation — and Treasury yields rise sharply in response — look out below.
Between the lines: Treasury yields are the foundation for interest rates consumers and corporations pay lenders.
- They're heavily influenced by growth and inflation data.
- When GDP is growing a decent clip, the job market is solid and inflation is peppy, rates tend to rise.
- If growth is weak, unemployment is up and prices are flat or declining, rates tend to fall.
Driving the news: Last Friday, a surprisingly strong May jobs report generated a sharp increase in market yields on U.S. Treasurys and reignited worries that persistent inflation might mean Fed rate hikes.
- An ugly stock market sell-off ensued — especially among chip stocks.
- Fun fact: The Nasdaq 100's 4.8% Friday dive was its worst day since the April 2025 tariff panic.
State of play: Things have stabilized since then, though the market remains on edge.
- The S&P 500 is down 3% from the closing record high it reached on June 2. The Nasdaq 100 is down over 5% from its high reached the same day.
The bottom line: Friday proved that high — and rising — inflation is a risk stock market investors have to watch.
What they're saying: "In 2021, earnings growth and inflation were booming but with the Fed on hold, stocks did well. Sound familiar? The question now is can the Fed continue to downplay the inflation risks and stay on hold," Morgan Stanley chief U.S. equity strategist Mike Wilson wrote in a note this week.
- "Given new chair Warsh's comments around AI as a potential productivity booster, we think the Fed will lean on the accommodative side at least through the mid-terms. This is exactly what the Fed did in 2021 until they could no longer ignore inflationary pressures."
What's next: Wednesday's CPI reading, which is expected to show headline prices up 4.2% in May from a year ago.
- If annual price increases top that number, stocks and investors may, again, run for cover.
