The US stock market's powerful two-month rally is sounding historical alarm bells. The S&P 500 index surged 16% from April to May, a gain that has occurred only four times since World War II. Three of those instances happened during recovery phases following economic recessions. The sole precedent not set against a recessionary backdrop was in the months leading up to the "Black Monday" crash of 1987.
Deutsche Bank macro strategist Henry Allen notes that the current rally is not unfolding in a post-recession recovery context, making the historical comparison particularly stark. Concurrently, credit spreads remain near historic lows, yet warning signals are building among consumers, expectations for Federal Reserve rate hikes are intensifying, and the divergence between sovereign bond markets and equities continues to widen.
With multiple risk factors converging, market tail risks are becoming unusually concentrated. Henry Allen wrote in a report, "The tail risks in the current distribution are unusually prominent, whether at the geopolitical or market level."
A Rare Historical Parallel with a Single, Troubling Precedent
The S&P 500's 16% gain over April and May has only four historical precedents since WWII.
Three of these occurred during powerful post-recession rebounds: the recovery after the COVID-19 pandemic in April-May 2020, the bounce following the global financial crisis in March-April 2009, and the rebound after the first oil crisis in January-February 1975.
The fourth instance was in January-February 1987. That period was just months away from the "Black Monday" crash in October of that year, when the S&P 500 plummeted 20% in a single day.
Henry Allen emphasizes that while the current rally has fundamental support, including fervent enthusiasm for artificial intelligence and robust economic data, "the pace of gains has broken all recent precedents." In an economy not emerging from a recession, a rebound of this speed has historically never ended well.
Furthermore, the S&P 500 is on track to achieve a fourth consecutive year of double-digit gains, a feat not seen since the late 1990s.
Credit Market Over-Optimism Masks Consumer Stress Signals
The stock market's strength has also spread to credit markets. Credit spreads in both the US and Europe are currently narrower than they were before the outbreak of the US-Iran conflict, indicating a high market tolerance for risk.
However, warning signs are accumulating at the consumer level. The US personal savings rate was just 2.6% in April. Historically, such low levels have only been seen during two periods: a single month in 2022 (when excess savings accumulated during the pandemic were being depleted) and on the eve of the global financial crisis. Simultaneously, the University of Michigan's Consumer Sentiment Index hit its lowest recorded level in May since records began in 1952.
Monetary policy conditions are also tightening. The European Central Bank is widely expected to raise interest rates this month, and market bets on a Federal Reserve rate increase in 2026 are heating up—supported by April's US PCE inflation reading of 3.8% year-over-year.
Henry Allen points out that historically, a hawkish Fed stance has often coincided with widening credit spreads, as seen in 2022, late 2018, and 2015-2016. The current calm in credit markets represents a significant departure from this historical pattern.
Bond Market Bears the Brunt Alone as Divergence with Stocks Widens
While equities and credit markets appear highly immune to geopolitical risks, the sovereign bond market is charting a completely different course.
Over the past month, the yield on the 10-year US Treasury note has moved almost entirely in sync with oil prices, decoupling from the movements of other asset classes. In mid-May, sovereign bond yields hit multi-year highs: the 30-year US Treasury yield rose to 5.18%, its highest since 2007, and the 10-year German bund yield climbed to 3.19%, a level not seen since 2011.
At that time, stocks were just a step away from all-time highs, while bond yields were at levels not witnessed in over a decade. This divergence shows no signs of narrowing.
Henry Allen believes the bond market is more directly pricing in inflation and fiscal risks, making it more sensitive to geopolitical shocks. The persistent disconnect between stock and bond markets is itself a manifestation of current market fragility.
Unexpected Oil Price Stability Acts as a Key Pillar for Risk Assets
The blockade of the Strait of Hormuz has lasted far longer than initial market expectations, yet the oil price reaction has been surprisingly muted. This partly explains the resilience of risk assets.
When the US-Iran conflict erupted on February 28, the White House initially anticipated the operation would last 4 to 6 weeks. However, the Strait of Hormuz remains blocked. According to data from prediction market Polymarket, the probability of normal navigation resuming by the end of June has plummeted from around 80% in mid-April to just 22%.
Despite this, the oil futures curve has remained relatively stable. Just two weeks after the conflict began on March 13, the six-month Brent crude futures contract settled at $85.66 per barrel. By June 1, that same contract was still trading around $84.88, having barely moved.
Henry Allen notes that because the oil futures curve has not shifted significantly higher, investors have not priced in a severe stagflation risk, thereby avoiding a larger-scale sell-off in risk assets. However, he warns that if the Strait of Hormuz remains blocked, it is unknown whether this support can be sustained.
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