Stocks are Cheering. Bonds are Warning. Who's Right?

Markets are telling us two different stories right now, and we need to pay attention to both.

On the surface, things look great. Stocks hit new all-time highs last week, and this time it's not just a few big AI companies driving the gains. Equal weight S&P 500 is up 15% this year. Small caps are up nearly 20%. And earnings revisions are moved higher in 2027, not less. The reason behind this strength is simple: the demand for computing power to run AI is enormous, and big tech companies, private investors and even governments are pouring hundreds of billions of dollars into building the infrastructure needed to keep up.

But underneath that good news, something quieter is happening in the bond and commodity markets, and it deserves our attention. The interest rate on the 30 year Treasury bond has climbed to around 5.25%, and it is not acting the way it normally would. Usually, when we get weak economic news, like soft inflation numbers, disappointing retail sales, or a weak jobs report, interest rates fall. Instead, rates dip briefly and then climb right back up within days.

Part of treasury yields moving higher is happening here at U.S., tied to uncertainty about how the Fed might change how it measures inflation. Part of it is coming from overseas. European interest rates have actually risen even more than the U.S., likely because of energy costs tied to tensions in Iran. Diesel and fuel prices have been climbing on their own, separate from crude oil prices. At the same time, copper is showing supply squeeze signals we haven't seen since 2021. These are small warning signs worth watching, not ignoring.

Investor mood has also flipped. Just a few weeks ago, fear dominated the market. Now we are seeing greed. And margin debt ticked down from its peak for the first time since this rally began. Neither of these facts alone means sell everything, but together they tell us to stay careful rather than get comfortable.

Our takeaway: we are not fighting this trend. Earnings are strong, more stocks are participating in the rally, and AI spending is real. But we are watching risk closely, spreading investments across different sectors/assets, paying close attention to what the bond and commodity markets are signalling, and preparing our clients for the possibility that the next real challenge for markets may come from rising interest rates, not from stocks themselves.