Why the Bond Market May Be the Stock Market's Biggest Risk

Persistent inflation and strong nominal growth have shifted the Federal Reserve’s trajectory from rate cuts to a series of hikes, creating significant pressure on the bond market. Rising 10-year yields remain a primary risk to equity valuations, though this pressure is partially offset by massive AI capital expenditure and substantial fiscal deficits. While hedge funds have maintained strong performance, they are currently operating with lower leverage and reduced risk exposure. Despite concerns regarding a second-derivative slowdown in earnings growth, the market remains supported by robust corporate balance sheets. Japanese equities emerge as a compelling investment opportunity, driven by ongoing shareholder reforms and exposure to structural themes like re-industrialization and advanced manufacturing. Monitoring upcoming payroll data remains essential for gauging the next phase of market volatility and potential shifts in interest rate expectations.