US equities experienced their steepest decline since March last Friday, driven by a global bond market selloff, a surge in long-term Treasury yields, and inflation fears fueled by ongoing Middle East conflicts pushing oil prices higher. Data shows the S&P 500 recorded its largest single-day drop since March. The global bond selloff pushed the US 10-year Treasury yield above 4.5%, the Japanese 30-year yield to 4%, and UK long-term gilt yields to their highest level in 28 years. In the oil market, WTI crude rose 4% to settle above $105 per barrel, while Brent crude closed above $109. With no clear end in sight to the Middle East conflicts, investors are increasingly focused on their key economic consequences—rising global interest rates and inflation risks—as they enter the new week. At the time of writing, the US 10-year Treasury yield has climbed above 4.6%.
Reports from Iran indicate significant disagreements remain between the conflicting parties in negotiations to end the war. The reports state that the US "has not offered any substantive concessions" and is attempting to "gain concessions it failed to secure during the war, which will lead to a stalemate in talks." In a social media post last Sunday, the US President hinted his patience is wearing thin: "For Iran, time is running out. They better act fast, or they will have nothing. Time is of the essence!" According to US media reports, the President is expected to meet with his national security team in the White House Situation Room on May 19 local time to discuss plans for resuming military action against Iran. The stalemate between the US and Iran has delayed the reopening of the Strait of Hormuz.
Sam Stovall, Chief Investment Strategist at CFRA, stated: "Like a domino effect, the continued closure of the Strait of Hormuz will maintain upward pressure on oil prices, which is likely to further push inflation data higher and lead to rising bond yields. This combination will weaken consumer and investor confidence and may trigger a corrective pullback in the recent stock market rally."
For risk assets, last Friday's market performance was a rare setback in the nearly one-sided rally since April. Previously, despite war-driven price pressures, strong corporate earnings and economic expansion had propelled significant gains in risk assets like stocks, cryptocurrencies, and credit markets. However, the market is increasingly speculating that the de facto closure of the Strait of Hormuz will exacerbate energy supply disruptions and potentially further fuel inflation.
Data released last week showed US inflation continued to accelerate, driven by sustained increases in gasoline prices due to the Middle East conflicts and a jump in grocery costs. The Consumer Price Index (CPI) rose 3.8% year-over-year in April, marking the fastest pace since 2023. The Producer Price Index (PPI) surged 1.4% month-over-month in April, the largest monthly increase since March 2022, far exceeding the 0.5% market expectation. Year-over-year, PPI rose 6.0%, the highest level since December 2022, significantly above the 4.8% market forecast.
These figures indicate rising inflationary pressures in the US, prompting traders to increase bets on Federal Reserve rate hikes. Currently, the CME FedWatch Tool shows the market has largely priced out the possibility of a Fed rate cut before year-end. Conversely, the market now sees a 49% probability of the Fed raising rates by at least 25 basis points by December.
Jeffrey Gundlach, CEO of DoubleLine Capital, stated bluntly that investors should not expect the Fed to cut rates at its next policy meeting. He said: "The market originally expected two rate cuts this year, but inflation is simply not cooperating. In my view, when the two-year Treasury yield is nearly 50 basis points above the federal funds rate, the Fed simply cannot cut rates."
Due to concerns over tight energy supplies, a global corporate scramble for finished goods is likely to overshadow the war's impact reflected in business surveys over the coming week. Although May Purchasing Managers' Index (PMI) readings from Australia to the US are still expected to show economic expansion, the key question is whether these data points reflect economic resilience or merely manufacturers' "last gasp" before the full impact of the energy shock materializes.
Scott Ladner, Chief Investment Officer at Horizon Investments, said: "Ultimately, the Middle East wars will end, and commodity prices will fall back near pre-war levels. But as the US earnings season winds down, investor focus is shifting back to the macro picture, and the dominant theme of that picture right now is higher interest rates—which is always a headwind for stocks."
**US Stock Valuations and Technical Indicators Flash "Red Lights"**
Notably, as Treasury yields climb, two market signals significant enough to enter financial history books flashed warning signs simultaneously last week, indicating US stocks are experiencing an exceptionally rare dual extreme of valuation and technical conditions.
On the valuation front, the Shiller Cyclically Adjusted Price-to-Earnings Ratio (CAPE Ratio), developed by Nobel laureate Robert Shiller, has soared to 42.32, less than 5% below its peak during the 2000 dot-com bubble. The warning from a historically high CAPE is clear. Historically, the CAPE ratio typically fluctuates around a long-term average of 17. The current reading of 42.32 means US stock valuations have surpassed most periods preceding the global financial crisis, the post-pandemic rebound, and even the狂热 of the 1999 dot-com bubble era. Historically, this indicator has reached similar or higher extreme levels only during two periods: just before the 1929 Great Depression and just before the 2000 dot-com bubble burst. Every major crash has begun with a sharp spike in the Shiller P/E.
Synchronized with the valuation surge is market concentration. The top ten constituents of the S&P 500 now account for over 40% of its total market capitalization, nearly 50% higher than the approximately 27% level during the 2000 dot-com bubble. Tech giants like Nvidia, Apple, and Microsoft have contributed the vast majority of the index's gains, highlighting a structural dependence on a handful of stocks.
In his annual outlook report, Ben Snider, Goldman Sachs' new Chief US Equity Strategist, noted that the combination of "high valuations, extreme concentration, and strong recent returns" in US stocks is structurally very similar to market conditions preceding several overheating episodes in the 20th century.
On the technical front, a rare warning signal—the "Hindenburg Omen"—was triggered simultaneously on both the New York Stock Exchange and Nasdaq, reigniting fierce debate among traders about whether the US stock market's prosperous surface is becoming increasingly fragile underneath. Historical data shows the Hindenburg Omen has appeared multiple times before significant market corrections, including the 1987 crash, the dot-com bubble burst, and the eve of the 2008 financial crisis. In February 2026, the signal triggered three times within six days, with a total of eight signal clusters over the past six months. Analysts warned at the time that "signal clusters often foreshadow the formation of market tops."
Entering May, internal market structure has further deteriorated. According to the latest data, while the S&P 500 has frequently hit new highs recently, the divergence between the number of NYSE stocks hitting new highs and new lows has continued to widen. Capital is highly concentrated in a few large-cap stocks, and overall market participation has declined significantly.
Goldman Sachs' Chief US Equity Strategy team warned in a recent report that the current US stock rally is highly concentrated in a few mega-cap tech stocks, market breadth has fallen to lows not seen since the dot-com bubble, and downside risks are accumulating. However, traders also caution that the signal itself may be prone to false positives, and a single trigger does not guarantee an imminent market crash. Technical analysts typically look for further confirmation signals in subsequent trading days to assess the omen's validity.
Each signal alone warrants attention, but more importantly, they both point to the same underlying issue: beneath the prosperous表象 of indices repeatedly hitting new highs, the breadth of participation in the rally may be narrowing dramatically. The狂欢 of a few giants is masking the weakness of the majority of stocks.
**RBC, BofA Sound Alarm: 10-Year Yield Above 5% Could Hit US Stocks Hard, June May Be "Exit" Window**
As concerns over intensifying inflation pressures boost expectations for Fed monetary tightening, pushing Treasury yields higher, the US stock market—which has shown strong momentum driven by the AI narrative—faces a critical test. Wall Street giants RBC Capital Markets and Bank of America have both issued warnings.
Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, raised her target for US stocks but warned that a 10-year Treasury yield rising to 5% would challenge the bullish stance on US equities—a level that typically weighs on valuation multiples. Calvasina raised her 12-month target for the S&P 500 to 7900 from 7750. This new target is based on assumptions of earnings per share (EPS) of $329, a 10-year yield of 4.5%, US inflation at 3.3%, and the Fed holding rates steady. She added that if inflation rises to 3.8%, the 10-year yield reaches 5%, and the Fed is forced to hike rates, her S&P 500 target would be lowered to 7400.
Calvasina also stated that based on her firm's model projecting S&P 500 EPS of $329 by early 2027, if corporate earnings fall 5% year-over-year, the S&P 500 would drop to 6300. She noted that a 10-year yield of 5% "seems to unsettle the market," adding, "These calculations show that what truly supports US stock valuations is the earnings story. The pressure from interest rates and the P/E multiple are headwinds the market must face." However, she also pointed out that as companies increasingly turn to long-term debt financing and reduce floating-rate and short-term credit, the sensitivity of US corporate profits to fluctuations in the 10-year yield is declining. She also noted that corporate net debt levels are decreasing over time.
Meanwhile, Michael Hartnett, Chief Investment Strategist at Bank of America, suggests US stocks may face a wave of profit-taking in early June due to heavy investor inflows and rising inflation risks. Hartnett said: "The process of investors chasing stocks and tech across the board may be completely exhausted in the coming weeks, making early June a suitable time for moderate profit-taking."
Hartnett and his team note that price pressures in the US are spreading widely, from energy and transportation to rent, even as US stocks continue to hit record highs. Furthermore, a series of events in June—including OPEC meetings, the World Cup, the G7 summit, and the first FOMC meeting under Chair Wash—could serve as market catalysts, making June an ideal time window to reduce positions.
Hartnett and his team believe that unless the 0.4% month-over-month CPI growth seen over the past six months slows rapidly, US CPI year-over-year growth could very likely exceed 5% before the November midterm elections—a scenario unfavorable for stocks. Hartnett stated that when CPI year-over-year growth surpasses 4%, "risk assets start to get nervous." Based on data from the past 100 years, once CPI growth breaks above this level, the S&P 500 has historically fallen an average of 4% over the subsequent three months and 7% over six months.
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