In Bloom

“And I say he’s the one Who likes all our pretty songs And he likes to sing along And he likes to shoot his gun But he knows not what it means Knows not what it means And I say yeah“ 

– In Bloom, Nirvana, 1991

After what has been another difficult first few months of the year for the second year in a row (remember the Liberation Day tariffs around this very same time last year?), the U.S. stock market is once again in bloom.  Following a near -10% decline in the S&P 500 starting in late January through the end of March, the market has bounced a resounding +11% with gains in 10 out of the last 11 trading days, setting fresh new all-time intraday highs in the process.

This current stock episode is the latest of so many examples throughout history of why it is so important not to succumb to the stresses of geopolitical conflict and the associated financial media headlines by trying to time the market event.  Is the outcome of the Iran conflict any clearer than it was two weeks ago?  Kinda.  But the market got the economic and financial break in the clouds it needed (promises of settlement talk and the potential reopening of the Strait of Hormuz simply being on table), and the rally has been on like Donkey Kong since.  Just as you never want to try to fix the roof of your house during a hurricane, once you’re in the midst of a market storm like we’ve experienced over the last couple of months, it is almost always best to “wait for the bounce” once the volatility has cleared and then decide whether you want to take risk off the table.

What is this Chief Market Strategist’s take with the S&P 500 having already bounced from 6316 to just over 7000 since March 30?  Cue the movie reference first shared in my article from Halloween 2025:

And I say yeah.  So why the continued short-term optimism for the U.S. stock market despite the lingering uncertainty?  Let’s begin with the technicals in the chart below.  The market cap weighted S&P 500 has already blasted like a blow torch through butter all of its key moving average resistance lines.  How fast is this market moving?  When I started writing this article before getting pulled away yesterday, we were over 65 points away from new all-time highs first set in January effectively at 7000.  As I resume the writing of this article this afternoon, we’ve already crested as high as 7008 and the trading day isn’t even over yet.  While some amount of consolidation may soon be overdue in the next few days with the S&P 500 now arriving at overbought levels (RSI of 68), we should not be surprised to see the S&P 500 trading north of 7250 by the time we’re firing up our Memorial Day barbeques.

But is there a basis for this stock market rally to continue?  And I say yeah.  Let’s go around the horn.

Economic growth outlook?  The U.S. economy appears to be losing some steam with the Atlanta Fed GDPNow for 2026 Q1 drifting down to +1.3%.  But the important point is that the economy is still growing, and early projections for 2026 Q2 are similarly positive for growth if not marginally more so.

Inflation expectations, while understandably elevated given all that has been going on in the Middle East and with oil prices, are still at a more than reasonable 2.6% on average for the next five years.

And corporate earnings growth projections, which are the primary determinant of stock market returns over time and had already been robust, continue to get revised higher with profits now expected to increase at a high teens rate through the rest of 2026 and into 2027.  And with first quarter earnings season now getting underway, investors will be provided with fresh visibility into the earnings outlook for the coming quarters.  And this reduction in uncertainty and additional timely information is one of the reasons why stocks traditionally perform fairly well during earnings seasons over time.

“He’s the one who like all our pretty songs And he likes to sing along And he likes to shoot his gun But he don’t know what it means Don’t know what it means to love someone”

–In Bloom, Sturgill Simpson, 2016

Given this decidedly positive short-term outlook, it is worthwhile to consider a different take on this market song.  Importantly, the markets continue to grapple with downside risks that need to be monitored closely in the months ahead.

While a renewed rise in inflation continues to linger as the primary downside risk for financial markets (higher inflation would mean the need for tighter fiscal and monetary policy, and since I have a better chance of finding an Asian Unicorn (Saola – actually exists – look it up) than a politician in Washington DC willing to raise taxes on anyone other than trillionaires, the Fed’s going to have to do the heavy lifting by raising interest rates, thus draining liquidity out of financial markets and sending asset prices lower all else equal), a new primary risk continues to unfold that warrants close attention.  Could it go by the way of commercial real estate in 2023 that ended up being a nothingburger?  Absolutely.  But it is important to monitor nonetheless in the months ahead.

What is this risk?  Signs of potentially accumulating bond market stress.

Now don’t get me wrong.  I was a huge fan of the bond market for decades.  A more than forty-year bull market run from 1981 through 2021 will do that.  But since the inflation outbreak in 2022 that normalized interest rates, we have been operating in what may be best described as a bear market in bonds in the last five years since.  This does not mean that bonds still can’t offer highly attractive returns for investors – after all, some of the greatest periods for stock market investing took place during the secular bear markets of 1968-1982 and 2000-2012.  Instead, it just means that investors may need to work harder to get the attractive returns that bonds have to offer today.  If anything, it highlights the importance of identifying the best professionals to capture the investment opportunities that exist in these areas of the market.

So what are we seeing today that we need to monitor going forward?  Here are a few high level indicators.  (Why if you are a stock investor do you care?  Because the bond market not only sets the liquidity but also the valuations upon which the stock market is built).

The first is the 10-year U.S. Treasury Yield.  After surging from 0.5% in the wake of the COVID outbreak in 2020, it has been rangebound between 3.5% and 5.0% for the last three years since 2023 (higher bond yields, lower bond prices).  If the 10-Year U.S. Treasury yield finds itself jumping sustainably above 5%, this is not a good sign.  Today, we are at a comfortable 4.25% right smack dab in the middle of the range, so nothing to worry about right now.  But just as the S&P 500 can make its way from 6316 to over 7000 in a figurative heartbeat, so too can Treasury yields move at a similar pace.

Next and more importantly is what is known as spreads, or the additional premium that investors require to take the risk to own bonds other than Treasuries.  The higher the spreads, the more risk averse the underlying investors.  The more risk averse, the more likely asset prices including stocks and bonds are going down.

What have we been seeing recently?  SInce bottoming in early 2025, credit spreads have been steadily on the rise.  Focusing on CCC & Lower US High Yield Index spreads that historically have been the first to show signs of stress that eventually spread to the broader market, we have seen spreads widen from the lows just before 7% at the beginning of last year to above 10% for the first time since the Liberation Day tariff related spikes in spreads took place just over a year ago.  We’re currently at the high end of the neutral zone, but if spreads start moving sustainably above 10% or more, we should be prepared for this risk-off sentiment to spread to other more established market segments.

As already mentioned, we’ve seen risks like these bubble to the surface in the past, and they ended up coming to nothing as the S&P 500 continued to go like hell to the upside.  And as the CBOE Volatility Index (VIX) (and potentially soon oil prices) have shown us, months of accumulated stress – the VIX had been steadily rising since December – can release itself in a matter of days if not hours.

Bottom line.  With the onset of spring, capital markets are once again in bloom.  Stocks are back to new all-time highs.  Bonds are rallying.  Precious metals are glistening anew.  We are not without downside risks, but continuing to resist the headline risk and staying dedicated to your long-term investment strategy continues to be rewarded as much as ever.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.

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Eric Parnell, CFA Chief Market Strategist

Eric Parnell is the Chief Market Strategist for Great Valley Advisor Group. Eric applies his expertise in finance and economics to manage multi-asset portfolios, mitigate risk, deliver advice that promotes informed decision-making, and facilitate investors achieving their short-and long-term investment goals. He leads the GVA Asset Management platform overseeing the management of asset allocation models for GVA advisors and their end clients.

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