Bonds Are Flashing a Warning to the Stock Market as Earnings Season Approaches

Bond markets opened the week with movements that were again out of sync with the broader gains in equities as yields edged higher into a week bereft of economic data and investors focused firmly on the start of the second-quarter earnings season later this week and next.

The opening levels Monday, in fact, extended an advance in 10-year note yields, which jumped more than 10 basis points last week despite a host of events that would normally have pared gains for the benchmark paper.

New Federal Reserve Chairman Kevin Warsh suggested a modestly dovish tilt for the central bank based on softening inflation forecasts, which were given more credence amid the ongoing decline in oil prices. Weaker-than-expected jobs data, alongside fading readings of second quarter GDP growth, added to the mix, but rate hike bets remain firmly in place.

Minutes from the Fed’s first meeting under Warsh’s leadership will be published on Wednesday.

“The market is still dissecting the combination of a new Fed chair and falling oil prices following the fragile deal between the U.S. and Iran,” said Antonio Gabriel, global economist at Bank of America.

“Inflation breakevens are certainly falling, and lower oil prices are probably helping on that front,” he added. “However, the key story the market is pricing is that a hawkish Warsh Fed will deliver tighter real policy rates to help bring inflation down. Time will tell.”

Still, stocks had their best week since early May, with the S&P 500rising more than 1.76% over the holiday-shortened period, and the tech-focusedNasdaq Composite gaining more than 2.1%. TheDow Jones Industrial Average, meanwhile, gained 2% and closed at a record high 52,900.

Futures suggest further gains to start the week, as well, but the stubborn nature of Treasury yields, with 2-year notes holding north of 4.1%, well above the fed-funds rate of between 3.5% and 3.75%, and 10-year paper changing hands at 4.46%, is worth noting.

“Whilst there’s still a clear bullish tendency, caution will likely prevail ahead of the Q2 earnings season, which kicks off at the end of the week before picking up pace with the major banks the following week,” said Raffi Boyadjian, lead market analyst at Trading Point.

“All eyes will be on whether all the [artificial intelligence] capex by the big hyperscalers is producing significantly higher revenue growth and whether chipmakers and other AI enablers continue to enjoy rising demand,” he added.

The early forecasts are solid, with LSEG data suggesting a second-quarter earnings gain of 24.4%, with a headline tally of just under $700 billion, paced by three tech-heavy sectors and $116.3 billion in financial sector profits.

But concern over disappointment is building.

The PHLX semiconductor index, which has soared more than 70% since the start of the year and powered the lion’s share of market gains since the late March nadir, has fallen more 16% since its June 22 peak.

An index of the Magnificent Seven tech giants, meanwhile, has gained only 0.7% over the same time period, and remains more than 9% south of the peak it reached in late May.

“The big question is whether earnings can live up to those lofty expectations,” said Megan Fisher, assistant economist at Capital Economics. “If not, the sustainability of both the equity and the AI-driven Capex booms is called into question.’

Bond markets might be sounding an early warning on that score, especially given the myriad reasons for a pullback in yields heading into the start of the third quarter that have yet to translate into firmer Treasury prices.

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