Stocks Are Priced for a Rate Cut. Bonds say, Good Luck.

Wall Street and the bond market are looking at the same Fed and seeing two different futures.

Coffee at the ready…

Your mortgage rate rides on who's right.

The record-high stock rally is built on a rate cut the bond market doesn't think is coming.

The S&P 500 closed at an all-time high on Monday, its ninth straight weekly gain. At these prices, stocks need the Fed to cut rates to justify themselves. But the Fed can't cut while inflation sits at 3.8%.

So Wall Street is betting big on the one thing its own inflation problem makes hardest to deliver.

The tell for whether the bet pays off is flashing in the bond market.

The scoreboard first.

The S&P 500 ended Monday at 7,599.96, a fresh all-time high, with the Nasdaq and Dow at record highs as well. But the index trades near 23 times forward earnings, well above its long-run average. Stocks this expensive are priced for perfection.

Cheaper money from the Fed is a big part of the picture.

The bond market is voting the other way.

The 30-year Treasury yield touched 5.2% in mid-May, its highest since 2007. It eased as oil fell below $90, but the 10-year still sits far above its pre-scare lows. The reason is on the price tags. US inflation ran 3.8% in April, the fastest in three years, and barely budged as oil dropped. A Fed staring at 3.8% does not cut rates.

High yields are traders betting the cut stocks need won't come.

So watch the tell.

If yields keep falling, bonds are starting to believe cuts are coming, and the rally has room to run. If yields climb back toward 5%, bonds call the bet wrong, and stocks priced for perfection fall hard. This isn't just a Wall Street parlour game, either. From a desk in Saigon, the same Fed call lands close to home. A Fed on hold keeps pressure on the dong and forces the State Bank to hold its rates high.

The cut Wall Street is praying for is the one Vietnam is waiting on, too.

Pro (stocks are right): Earnings growth is real, oil is falling, and cooling inflation could hand the Fed room to cut by autumn.

Con (bonds are right): At 23 times earnings, stocks need cuts ruled out by 3.8% inflation, and the bond market is pricing the cuts away.

Our read: Stocks are writing a cheque the Fed can't cash while inflation runs this hot. Watch yields around the June Fed meeting for the answer.

[Report] Federal Reserve: "Selected Interest Rates (H.15)"

The Fed's own daily table shows long-term yields stuck near 20-year highs. That's the bond market betting against a rate cut.

Why it matters: It's the clearest sign of whether the cut stocks needed are on the way.

30-year Treasury yield hit 5.2% in May, the highest since 2007.

Yahoo Finance: JPMorgan sees 8,000 "if the Fed keeps cutting." The rally's rate-cut dependency, in one target.

CNN: 30-year yield hits its highest in 19 years. The bond side, refusing to play along.

Wolf Street: A $691bn week of Treasury sales. Why does the supply keep pushing yields up?

Does the Fed cut rates in 2026?

You can read all our back issue newsletters for free here.

For the love of coffee, see you tomorrow!

Enjoy your Wednesday, keep it caffeinated.

Wednesday, done.

Read yesterday’s newsletter about Instagram’s hack here.

Thanks for reading!

Are you subscribing?

Join your crew of caffeinated sceptics today.

Be sure to get your daily Curse and Coffee fix by hitting the button below.

Open Monday to Friday.