A Key Signal of Uncertainty
How bonds and equities are pricing two possible paths
Torsten Sløk, Apollo Global, is highlighting a classic, and very real, market divergence that’s puzzling investors right now:
Bond market says: “Growth is cooling. The Fed will cut.”
Equity market (cyclicals vs. defensives) says: “Growth is picking up. Risk-on.”
At first glance, that does seem contradictory, but let’s break it down carefully.
Here's what may be going on:
Two markets, two interpretations of risk.
Bond Market View: defensive, forward-looking
US Treasuries (UST) are pricing rate cuts = belief that growth and inflation will slow.
Often driven by:
Softening labor data
Tighter credit conditions
Disinflation in pipeline (e.g., PPI, rent moderation)
Outcome: Duration rally = expectation of easier policy ahead.
Note: Bonds often reflect macro deterioration before equities do.
Equity Market View: risk-on rotation
Cyclicals outperforming defensives = belief that economy is re-accelerating, or at least avoiding a recession.
Possible drivers:
AI/tech optimism spills into broader risk assets
Strong consumer spending in select sectors
Soft landing narrative: inflation easing without job destruction
Outcome: Positioning unwind (investors rotating out of defensives after underperformance)
Note: Stocks often reflect sentiment, liquidity, and positioning - not just macro.
Who’s right? It depends on the time horizon.
The divergence might reflect different timelines, not necessarily irrational pricing.
Alternative interpretation: maybe both are “right” for now
It’s possible that:
The Fed will cut, not because of crisis, but because inflation is falling faster than expected.
At the same time, growth doesn’t crash, and risk assets perform well.
This is the “Goldilocks scenario”:
🔹 Inflation down
🔹 Growth stable
🔹 Fed easing
🔹 Equities up
But beware: Goldilocks is rare and fragile.
A final take: How to read the divergence
It’s a key signal of uncertainty: investors don’t agree on what’s next.
Bond market tends to be early but often right about macro turns.
Equity market may be chasing relative strength, liquidity, and soft-landing hopes — or simply rotating on momentum.
If growth truly slows sharply, equity cyclicals will likely reverse, validating the bond signal.
If growth re-accelerates, the bond rally may unwind, and yields move higher again.
