Bond Market Threatens Stock Market's Four-Year Bull Run

Tony Pasquariello, Goldman Sachs' global head of hedge fund coverage, warns that the bond market is a clear and present danger to the stock market's four-year bull run. He attributes this risk to the US Treasury market, where the ten-year yield continues to make higher highs despite a 'hawkish hike' regime.

The transmission mechanism from bonds to stocks is direct, according to Pasquariello, who described the recent equity market downturn as a 'pinch' sourced from the bond market. He notes that this pressure comes not from the Federal Reserve's messaging but from the debt-and-deficit narrative.

Pasquariello expects S&P 500 returns to remain positive but on a lower gradient, with earnings growth decelerating from 25-30% to around 10-12%. He is also bullish on Japanese equities, specifically TOPIX over Nikkei, due to shareholder reform and re-industrialization.

The key data point to watch, according to Pasquariello, is the next payroll print, which will dictate whether the bond market's pressure on stocks intensifies or relents. He recommends shorting the bond market as a hedge against equity exposure, rather than trying to time an equity drawdown.