Trend-followers are enjoying the current rally in U.S. equity indices, with the S&P 500 and Nasdaq continuing to grind higher, painting a picture of resilience. But beneath the index-level strength, individual stock trading remains erratic. Traders are grappling with choppy setups, navigating between punishing whipsaws and euphoric surges. This is particularly present in small-cap AI and momentum-driven names. It’s a challenging landscape for managing risk, one that requires precision timing and adaptability, rather than broad confidence in market direction. Broadly however, small- and mid-caps have not confirmed the move of the SP500 and NASDAQ into new highs, though trending up.
While equities move higher, the bond market is painting a more cautionary tale. Yields on the U.S. 30-year Treasury have once again breached the 5% mark, which is a psychologically and historically significant level that has often coincided with increased strain in debt markets. The message from the long end of the curve is clear: investors are reassessing the risk profile of U.S. fiscal policy, inflation, and future rate trajectories. Recent fiscal announcements, including the so-called “Big Beautiful Bill,” have sparked fresh concerns about deficit expansion and the long-term credibility of US debt.
The dollar has weakened alongside this shift, while inflation expectations are ticking back up. Goldman Sachs now projects core PCE to rise above 3.7% by the end of the year, suggesting that the recent inflationary reprieve may have been premature. The recent CPI print, which came in hotter than expected, rattled markets and quickly cut the odds of a September rate cut to around 50/50. This has placed the Federal Reserve in the difficult position, and its previously-telegraphed easing cycle is becoming harder to justify.
For much of the year, the Fed has maintained a cautiously dovish stance, hinting at multiple rate cuts. But should upside inflation surprises continue, it will find itself increasingly constrained. Political pressure is mounting as well, with Trump repeatedly calling for sharply lower interest rates, framing current borrowing costs as a deliberate obstacle to economic growth. Yet, the bond market appears unmoved by political rhetoric. The repeated push toward and beyond 5% on the 30-year bond suggests investors are more concerned about structural inflation, fiscal excess, and the Fed’s ability to maintain price stability.
Even as U.S. markets on average remain largely buoyant, we should look abroad for better risk-adjusted opportunities. Select international markets, including Canada, Japan, China, Hong Kong, and parts of Europe, are showing relative strength in specific sectors. Precious metals, for instance, are catching a bid as a hedge against persistent inflation and currency volatility. Heavy industrials and defense names are benefiting from elevated global infrastructure spending and geopolitical shifts. Meanwhile, tech and electronics firms, particularly in Asia, offer more favorable profiles compared to their U.S. counterparts.
Simultaneously, the crypto space is heating up again. From blue-chip digital assets to more obscure DEX pairs, momentum appears to be back. The resurgence across these risk-on pockets adds weight to the view that we are once again entering a period of heightened speculative appetite, which is often a late-cycle phenomenon. This does not mean anything drastically for right now and we shouldn’t throw the baby out with the water, but taken together all these signs suggest that risk is rising across the board, even if the surface-level story still looks bullish.
Crucially, inflation may prove far stickier than the market had hoped. Service-sector prices remain elevated, insurance premiums are rising, and wage pressures are slow to recede. Consumer confidence is beginning to falter, even as equities post new highs. The Fed sees the risks. The bond market does too. The question is when equity markets will begin to price them in. If 5% on the long bond yield becomes a new floor rather than a ceiling, it may mark the beginning of a more turbulent phase for markets.
For now, optimism still rules. But beneath that optimism, cracks are forming. The tension between growth hopes and inflation reality continues to widen, and the longer it persists, the more volatile the adjustment may be.
So long – stay safe and always manage risk first!
TGS
