May 25, 2025
Weekly Market Outlook
By Geoff Bysshe
From everyone at MarketGauge, we’d like to extend our thanks and gratitude to all those who have served in our armed forces and to their families! We hope everyone enjoys the Memorial Day weekend.
The stock market likes to grab onto a theme and follow it - for better or worse.
There are often multiple themes driving market, but when there is a primary underlying theme, it will take over. The most recent example of this was the tariff tantrum.
The next major market driving theme is shaping up to be how the bond market responds to the 5% level in the 30-year bond, and potentially the 10-year bond shortly thereafter.
In the same way that the tariff theme was filled with surprising news, a rise and fall of investor anxiety, and unexpected market reactions, this process will repeat with the bond market as the culprit.
The bond market played a big role in the tariff tantrum by being the voice that is widely believed to be the impetus for Trump deciding to pause the most aggressive tariffs.
While the tariffs’ impact on the stock market in the near term may have been downgraded to a manageable headwind, the bond market remains poised to create big waves in the stock market, and the next reprieve for stocks may not be as easy as getting the President to change his message.
Let’s get prepared.
First, why now?
Next, how do we know when expectations for the bond market will affect the stock market like the tariff fears drove stocks?
Next, what should we expect the bond market’s direction to do to the trend of the stock market?
Finally, which way is the bond market likely to go next?
Why Now?
The bond market is almost always an important influence on stock prices, but there are times when it is the cause for concern or celebration behind major equity moves. Over the next several weeks, maybe through the summer, the bond market has the potential to trigger a meltdown or a melt-up in the stock market.
The short answer to the question of “why now?” is “5%.”
The 30-year bond at 5% and, even more impressively, the 10-year bond at this rate represent a level that will get the attention of investors, businesses, and politicians.
Additionally, the 5% level is set up to be an inflection point for a large move in the bonds. The move could materialize in either direction and be quick and substantial.
Stocks are good at digesting absolute levels of interest rates over time, but quick to react to changes in rates when they are quick and substantial.
For this reason, it is important to watch not only the 5% level, but also how the bond market trades around it. If the argument in this article that bonds will move away from 5% quickly does not materialize, then even if the media makes a big deal about 5%, stocks may simply price it in calmly.
5% is a big round, psychological number in the bond market, so it will get attention right when the bond market is facing technical catalysts and fundamental catalysts, either of which independently could ignite a large move in rates.
Before we address the catalyst, let’s look at the chart below to see how stocks and the long bonds (10 and 30 -year) have interacted over the course of the last bear to bull market cycle leading up to now.
Note the following progression marked on the chart below.
As we’ve seen, stocks can rally with ‘higher’ interest rates, but conditions have to right, and the rate of change has to be acceptable.
One of the conditions that doesn’t get much attention, but could become a significant problem, is the fact that foreign 10-year bonds have a similar pattern to the U.S.
As you can see in the chart below, several other developed markets have bond charts that look like they are ready to break out to new highs.
If rates are going up around the world, it will be harder for the U.S. to buck this trend.
Why Are Rates Creeping Higher?
There could be a lot of reasons why rates are going higher, but keeping the focus on their impact on stocks, the most important drivers of interest rates for stocks are:
The debate about growth and inflation has been front and center for the entire bull market and it will continue, but now there is a bigger, less predictable hurdle for the bond market to digest, and it could push the bond market in a big way in either direction.
The markets have a ‘complicated’ relationship with Congress. How markets will react to fiscal actions is hard to anticipate and often counterintuitive.
Plus, what will ultimately come out of Congress as a bill is equally as unpredictable.
Add the intentionally “go big” and “be unpredictable” tactics of the White House pushing its budget as the “Big ____ Bill” and we have an obvious catalyst for debt-conscious bond traders to react to quickly and substantially.
The challenge for stock investors (and bond investors) is that for the reasons mentioned above, the bond market could break out to the upside on fear of how the budget negotiations are progressing rather than waiting for the final outcome.
While the stocks have managed to climb out of their tariff hole despite rising yields, there is evidence that they are getting less forgiving of higher rates.
Below you’ll see the table showing the correlations of stocks, bonds, and gold over multiple time frames.
The red boxes illustrate that over the last 13 weeks, the correlation between rates that have been climbing has been positive. In other words, higher rates and higher stock prices, and at times lower rates with lower stock prices (growth concerns).
The top box, however, shows the 7-day correlation is now negative, which represents stock prices falling when rates rise.
The 30-day correlation (the middle table) shows that the negative correlation is not only not new, but it’s also getting more negative.
This suggests that if bonds break out over 5%, stocks will come under pressure.
If the catalyst is fear of deficit spending related to a bill that may not get passed until August the implications for stocks are not good.
We don’t need to be a political analyst to figure out how the bill will impact stocks – just watch the bonds!
While it may not be the most desirable outcome, the easiest outcome to recognize will be a bond market rally sparked by deficit fears that immediately drives stocks lower.
However, this is not a foregone conclusion.
There is also an optimistic possibility that a breakout in bonds could generate enough fear in Congress to find a fiscal solution that pleases the bond market and is received by the stock market as pro-growth. In this case, the 5% level could be an inflection point that creates a top in the bond market, like it did in 2023, and set the stage for higher stock prices.
More likely, the Big ___Bill is likely to be a headline risk until it’s passed, and the stock market will add it to the challenges of weighing changes in growth and inflation expectations.
In this “more likely” scenario, all the same volatility risks around the 5% level will exist until or if the bond market demonstrates it is capable of trading in a range around 5%, and stocks demonstrate they can adapt to the level.
One of my favorite indicators for anticipating market direction suggests that long bonds are set up for a big move. As discussed above, the stock market will likely have a negative correlation (do the opposite) of any quick and or substantial move in the bond market.
Momentum Indicators Suggest A Big Move
The chart below is the 30-year bond rate with our Real Motion (RM) Indicator on it in two time frames. The top Real Motion chart is a time frame that reads the 50 and 200-day time frames. I’ll focus on that one.
I’ve shaded the high-level bullish and bearish times with the red and green boxes. The simple interpretation reads like a price chart – when the fast moving average (blue, 50-day MA) is over the slow moving average (green, 200-day MA), it’s bullish, and vice versa is bearish. When the dot (the daily close) is green, it’s over the fast MA and bullish.
When RM is running ahead of the same condition in price, the price generally follows. Beware of any price action that is not confirmed (replicated) by the RM pattern.
The basic analysis of the chart above:
The summary is that rates are trying to break the 5% level with bullish momentum. If the break succeeds, the momentum could carry rates substantially higher, but the move is currently extended in a way that a reversal could snap back and establish a significant top.
What Happens to Stocks If Bond Consolidated In A 5% Environment?
The short answer is, “it depends.”
It depends on the same factors we discuss in this article almost every week.
If economic growth is maintained, strong stocks with high multiples will require more robust growth to maintain their lofty prices. Less rate sensitive stocks could become new market leaders. Interest rate sensitive sectors will likely suffer. The market will “rotate.”
In our discretionary mentoring service, we’ve been tracking what we’ve called “Tariff Proof” stocks and ETFs that adapted to or avoided the hardships of the tariff chaos and have been big winners. This happens in every market that isn’t overwhelmingly bearish.
The Tariff Proof stocks report has been a huge success, so we’re expanding it into what will be called the “MarketGauge Momentum Report.” Keep your eyes out for it.
In our model driven strategies, we raised cash as the market fell to protect against the potential for large and protracted drawdowns. Then, as the market recovered, we redeployed capital in the stocks and sectors that had demonstrable leadership.
Until the market turns lower with the catalyst of a “hard landing” recession, the bull market is intact, but higher rates will be a substantial headwind.
The bull's ideal scenario is probably that rates retreat based on a belief that the deficit is not a crisis, inflation continues to decline, and the economy enables companies to continue beating earnings estimates.
As crazy as that may sound, we were on our way there before the tariff chaos.
We’re a long way from that now, but sometimes expectations of where we’re headed are more powerful than the reality of arriving at the destination.
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 Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts.
The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. The video analysis dives deeper. |
Summary: The overall sentiment is cautiously bullish, supported by strong technical trends and leadership from growth and global equities, but tempered by short-term market weakness, neutralizing risk indicators, and pockets of defensive outperformance like Gold.
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