The bounce, the bonds and the budget: What investors should watch next
After a sharp sell-off in early April, U.S. equity markets have delivered a textbook V-shaped recovery — leaving investors wondering whether the volatility was merely a brief detour or a warning sign of deeper risks ahead. While equity enthusiasm returned quickly, not all corners of the financial markets are convinced that the all-clear has been sounded. Underneath the surface, mounting concerns over debt, inflation and fiscal discipline continue to simmer.
So what, exactly, sparked this rebound — and is it sustainable?
The Bounce: Stocks Rebound on Trade De-Escalation
Chief Investment Officer Thierry Hasse
This swift recovery was largely fueled by a softening in U.S.-China trade tensions. Last weekend, both nations announced that a new trade agreement is within reach.
As part of the détente, each side agreed to suspend punishing tariffs — previously as high as 145% — that had effectively frozen bilateral trade.
The result: U.S. equity indices enjoyed their best weekly performance of the year, with the S&P 500 rising 5.3% for the week. (Source: CNBC.)
The Bonds: Vigilantes Signal Caution
While equity investors embraced the optimism, bond markets sent a more sobering message. The term “bond vigilante,” first coined by economist Ed Yardeni, describes investors who push back against excessive government borrowing by selling bonds — driving yields higher. Today, these vigilantes are back in action.
Yields on 10-year U.S. Treasuries climbed toward 4.5%, while the 30-year long bond approached the critical 5% mark. These levels matter. Any additional upward pressure on rates could challenge equity valuations and investor sentiment.
Behind the bond market’s unease: Persistent U.S. fiscal deficits, an expanding debt burden and concerns that new tariffs may reignite inflationary pressures. Government spending remains above 6% of GDP — a level historically seen only during deep recessions. (Source: Barron’s.)
The Budget: Moody’s Downgrade Highlights Fiscal Stress
After the market closed on Friday, Moody’s Ratings made headlines by downgrading the U.S. sovereign credit rating from Aaa to Aa1 — removing the last of the top-tier scores among the three major rating agencies. Fitch and S&P Global had already taken similar steps in prior years.
Though this downgrade was widely anticipated — Moody’s had placed the U.S. rating on negative watch since November 2023 — it underscores a troubling fiscal outlook. The timing was deliberate, arriving just hours after markets closed for the week. Investors will likely begin Monday pricing in a more cautious stance, with possible pressure on both the dollar and Treasuries. If profit-taking follows, the equity rally could face its first true test.
This Week: All Eyes on Policy and Pricing Power
Just as trade tensions ease, new fiscal roadblocks are emerging. Late Friday, the House Budget Committee rejected the administration’s sweeping tax and spending proposal — nicknamed the “Big Beautiful Bill” (BBB). This legislative setback came within hours of the Moody’s downgrade, marking a double blow to the White House’s economic agenda.
With the clock ticking on the 90-day tariff pause, the administration now pivots to a new objective: extending the 2017 tax cuts, a central campaign promise. But with investor scrutiny already elevated, any sign of further fiscal imbalance may meet resistance from bond markets.
On the corporate front, first-quarter earnings season is drawing to a close. Walmart delivered upbeat results last week, providing some reassurance on consumer demand. This coming week, Home Depot, Lowe’s and Target will report. Their guidance will be closely watched — not just for earnings trends, but for any signs that new tariffs are affecting supply chains or pricing strategies.
If companies signal that costs will be passed along to consumers, the administration may respond with its now-familiar refrain: “Eat the tariffs.” How firms choose to absorb — or resist — that pressure will shape investor confidence heading into the summer.
Looking Further Ahead: Strength or Stretch?
The rally of the past few weeks has been impressive — but it may not be built on solid footing. While optimism over trade is welcome, the structural concerns around fiscal policy, credit ratings and interest rate trends remain unresolved. For investors, this is a moment to assess exposure and risk tolerance — not just celebrate the bounce.
At Elevage Partners, we continue to monitor the interplay between policy, market sentiment and the economic fundamentals that matter most to long-term investors. In a market where narratives shift quickly, we remain grounded in planning and preparation.
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