Original Author: Zhao Ying
Original Source: Wall Street News
The recent strong rally in U.S. stocks is triggering historical alarms. The S&P 500 index has accumulated a 16% gain from April to May, a magnitude of increase that has occurred only 4 times since World War II. Three of those instances happened during recovery phases following economic recessions. The sole precedent not in a post-recession context occurred just months before the "Black Monday" crash in 1987.
Deutsche Bank macro strategist Henry Allen points out that the current rally is not taking place against a backdrop of post-recession recovery, making the historical comparison particularly stark. Meanwhile, credit spreads remain at historically low levels, but pressure signals from the consumer side are accumulating, expectations for Federal Reserve interest rate hikes are heating up, and the divergence between sovereign bond markets and stock markets continues to widen.
With multiple risk factors converging, market tail risks are becoming exceptionally concentrated. Henry Allen wrote in the report, "The tail risks in the current distribution are exceptionally prominent, both at the geopolitical level and at the market level."
Historical Precedents Are Rare, Only One Non-Recession Example Exists
The S&P 500's two-month gain of 16% from April to May has only 4 precedents since WWII.
Three of them occurred during powerful rebounds following recessions: the post-COVID-19 recovery from April to May 2020, the post-global financial crisis rebound from March to April 2009, and the recovery rally following the first oil crisis from January to February 1975.
The 4th instance was from January to February 1987. That was just months before October's "Black Monday" — the day the S&P 500 plunged 20% in a single session.
Henry Allen emphasizes that the current rally has its fundamental support, including high enthusiasm for artificial intelligence and strong economic data, but "the pace of gains itself has broken all recent precedents." In an economy not emerging from a recession, a rebound of this speed has never ended well in history.
Furthermore, the S&P 500 is on track to achieve its fourth consecutive year of double-digit gains, a record not seen since the late 1990s.
Excessive Optimism in Credit Markets, Consumer Pressure Signals Overlooked
The strength in equities has also spread to credit markets. Credit spreads in both the US and Europe are currently narrower than before the US-Iran conflict erupted, showing the market's high tolerance for risk.
However, warning signals at the consumer level are accumulating. The US savings rate was just 2.6% in April, a similarly low level historically seen in only two other periods: a single month in 2022 (when pandemic-era excess savings were being depleted) and just before the global financial crisis erupted. Meanwhile, the University of Michigan Consumer Sentiment Index hit its all-time low in May since records began in 1952.
The monetary policy environment is also tightening. The European Central Bank is widely expected to raise interest rates this month, and market bets on Federal Reserve rate hikes in 2026 are heating up — with US PCE inflation reaching 3.8% year-on-year in April, providing support for this expectation.
Henry Allen notes that historically, hawkish stances from the Federal Reserve have often coincided with widening credit spreads, as seen in 2022, late 2018, and from 2015 to 2016. The current calm in credit markets forms a clear divergence from this historical pattern.
Bond Market Bearing Pressure Alone, Divergence with Stocks Continues to Widen
While equity and credit markets show high immunity to geopolitical risks, sovereign bond markets have charted a distinctly different course.
Over the past month, the yield on the 10-year US Treasury note has almost completely tracked oil price movements, clearly decoupling from other asset classes. In mid-May, sovereign bond yields hit multi-year highs: the 30-year US Treasury yield rose to 5.18%, the highest since 2007; the 10-year German bund yield climbed to 3.19%, the highest since 2011.
At that time, stocks were just a step away from record highs, while bond yields were already at levels not seen in over a decade. This divergence shows no signs of convergence to this day.
Henry Allen believes that bond markets more directly price in inflation and fiscal risks, hence reacting more sensitively to geopolitical shocks. The persistent divergence between stock and bond markets is itself a manifestation of current market fragility.
Unexpectedly Stable Oil Prices: A Key Pillar for Risk Assets
The blockade of the Strait of Hormuz has lasted far longer than initial market expectations, yet the reaction in oil prices has been surprisingly mild, which partly explains the resilience of risk assets.
When the US-Iran conflict erupted on February 28, the White House initially estimated the operation would last 4 to 6 weeks. However, the Strait of Hormuz remains blocked to this day. According to prediction market Polymarket data, 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 6-month Brent crude futures contract settled at $85.66 per barrel. On June 1, the same contract was quoted around $84.88, barely moving.
Henry Allen points out that it is precisely because the oil futures curve has not shifted significantly higher that investors have not priced in serious stagflation risks, thereby avoiding larger-scale selling of risk assets. However, he warns that if the Strait of Hormuz blockade persists, whether this support can be maintained remains uncertain.
