Has anyone done a stocks versus bonds, “someone has to be wrong” chart lately?

If not, it’s probably about that time, what with the S&P having logged two-dozen record highs in the space of three months and 10-year US yields near enough the YTD lows.

Are you picking up some sarcasm? I hope so. Because it’s in there.

One thing I learned a very long time ago, and one thing you should all learn if you haven’t yet, is that macro-market commentary, and particularly bearish macro-market commentary, is a template-based exercise. Not always literally (although sometimes literally), but that’s an accurate description of the process, which can be mind-numbingly rote.

Soul-destroying as this is, you need a set of go-to themes and motifs to work with so that when you run out of actual news to report — and you will on some days — you can rely on your templates.

One of those templates has a textbox with some boilerplate copy that works whenever equities are rallying and bond yields are declining in response to growth concerns. Below that first textbox is a space for a chart. Specifically, this chart:

Pretty compelling, right?! Two series which’ve track each other well all year have diverged dramatically.

The template has a second textbook which goes under that chart. In that textbox you say the following, or something like it (the truth’s in parentheses),

If past is precedent (it doesn’t matter if you’ve actually analyzed any precedent because no one will check), such a yawning disparity will likely resolve itself, and in fairly short order (again, that claim needn’t be verifiable because no one’s going to call you out). In this case that means yields will catch up to equities or stocks will catch down (the word “down” is always, always in italics there) to the macro reality of bonds which, it should be noted, are the smarter asset class.

See there, I could’ve been a market propagandist. Oh, wait… I was! That was a very long time ago, though. And it was a comparatively brief gig. I was a good writer back then, but nowhere near what I am today. Thank goodness I chose the righteous path. If my pen, refined as it is a decade later, was still being wielded in the service of the dark side, you’d all be in a lot of trouble.

Spoiler alert: The divergence illustrated in the chart’s almost always easy to explain, and this time’s no different. Since the beginning of June, 10-year real yields are 40bps lower, but 10-year breakevens are five basis points higher. Falling real yields can be rocket fuel for risk assets. At the least, declining reals tend to be supportive for equities in the absence of a serious economic downturn. Because lower reals are a “pure” financial conditions easing impulse.

That’s certainly not to suggest there’s nothing at all to the idea that a sharp decline in bond yields (whatever the compositional breakdown) set against an equity melt-up can be ominous if and when the proximate cause of the bond rally’s a growth scare. But for now anyway, the US labor market data’s being viewed by equities as unreliable or anyway in need of confirmation from the spending data, which by and large continues to argue against the recession narrative.

In the meantime, we’re coming off one of the best quarters for revenue and EPS beats on record (with the ad nauseam caveat that the beats were “fake” — a product of a bar that was lowered to account for “Liberation Day” and never re-raised ahead of Q2 results), current-quarter GDP tracking for the US is very solid and the Fed’s just started easing again.

Given that backdrop, the discrepancy between yields and stocks, if it has to “resolve,” may be more likely to close via yields rising, not stocks falling. That’s the view of Citadel’s Nohshad Shah.

“I remain bullish stocks [as] this can be the only conclusion when you have strong revenue and profit growth, a deregulation agenda that should create supply side expansion, company and household balance sheets that remain healthy, a record capex investment boom (and not only in AI), lower policy rates and incoming fiscal stimulus,” he said this month.

“10-year USTs look rich to me around 4%,” Shah added. “At this stage we are pricing pretty much peak dovishness relative to the current data, and if I’m correct about the forward, we should see a decent [bond] selloff.” Yields are up ~15bps since then and stocks have melted up further.