Despite the economy posting the two highest core inflation readings since 1992 in April and May (3% and 3.8% respectively), U.S. bond yields have trended lower during the past two months (graph below). Monetary authorities across the globe, led by the U.S. Fed, can pat themselves on the shoulder for their current success in convincing investors that rising inflation momentum will only be ‘transitory’ and will revert to lower levels with the passage of time and the full reopening of global economies.

Source: Strategas Research Partners

Without the pressure of rising interest rates, global equity markets continue to grind higher, though there are early signs of an underlying deterioration in their health. As the chart below shows, while the S&P 500 has made new highs, it has done so with far fewer stocks exhibiting positive short-term uptrends (stocks above 50-day moving average). This signal is not fatal for further equity gains but does demand a more prudent approach to market exposure.

Source: Bloomberg Finance

Our base case assumption remains that the recent government bond yield decline falls more into the normal pattern of price consolidation after a strong directional move. The weight of evidence as yet does not support any scenario related to a rapid deterioration in the global economic recovery. Indeed, looking further under the hood into recent equity sector momentum in the U.S. (chart below) would reveal that the sectors with the strongest stock trends over the last two months remain biased towards the more economically sensitive market segments such as Energy and Financials.

Strategas: Strategas Research Partners

This price action is broadly consistent with the underlying fundamentals of earnings growth. The chart below highlights the change in sector earnings growth expectations since the beginning of the year. The economically sensitive sectors of Energy, Financials and Materials have received the largest upward earnings revisions since January as economic and financial conditions remain supportive of a continuation of the global economic recovery.

Source: Strategas Research Partners