Recently, global capital markets have been undergoing a silent game of maneuvering.

Simply put, US stocks and US Treasuries are heading toward an unavoidable collision. Against the backdrop of high inflation and the Fed's dilemma, the simultaneous rise in stock prices and bond yields has become difficult to sustain.

Arthur Budaghyan, Chief Strategist at BCA Research, released a report pointing out that the current rally in the U.S. stock market is highly concentrated in the technology sector, with the internal market structure clearly deteriorating. The continued rise in bond yields will become the trigger for a substantial correction in the stock market.

Although U.S. stocks appear glamorous on the surface, their internal structures are already very fragile; Meanwhile, the continuous surge in U.S. Treasury yields could at any time become the needle that bursts the stock market bubble. For investors, blindly chasing high offers a very poor risk-reward ratio, and now is the time to reassess their asset allocation.

| Three major concerns beneath the booming U.S. stock market

Although the S&P 500 appears strong, if we peel back the surface and look at the core, we find that red flags have already appeared within the market:

Extreme reliance on tech stocks: This round of rally has been held up almost entirely by the tech, media, and telecommunications (TMT) sector. If these tech giants are excluded, the overall U.S. stock market is actually far below previous highs. This "one-man dominance" structure is very dangerous; once tech stocks stir, the market loses support.

Technical indicator divergence: Although the index is hitting new highs, the market breadth is deteriorating. Currently, only about 55% of the constituent stocks are above the 200-day moving average, and correlation between stocks has dropped to historic lows. Historical experience tells us that this extreme differentiation is often a precursor to a collective correction.

Credit spreads widen: Yields on US high-yield corporate bonds are rising, increasing credit risk. This is usually a precursor to rising stock market risk, indicating that smart "bond market funds" have started voting with their feet.

The report also specifically notes that U.S. households hold 250% of their disposable income, setting a new record. High stock prices are driving consumer spending and AI capital expenditure, while hyperscalers will not stop investing in data centers unless their stock prices fall or capital costs rise. This means that only a correction in the stock market can truly unleash the anti-inflation forces on the economic level.

| The Fed's "Dilemma" and the "Stickiness" of Inflation

The Fed is now caught in an awkward position, caught in a dilemma. On one hand, inflation data continues to explode (core CPI above 2%, PPI surges to 5.25%), and the Middle East situation pushes up oil prices, putting enormous inflationary pressure; On the other hand, economic data again shows signs of weakness.

Even more tricky is that the two-year U.S. Treasury yield has already surpassed the federal funds rate. Over the past 30 years, whenever this happened, the Fed was eventually forced to raise interest rates. This means that even if the new chairman Kevin Warsh remains on hold for now, the market has already priced in more hawkish policies. As the report states: "Central banks lag behind the inflation curve, which is bearish for both stocks and bonds." ”

Kingtech Perspective | Defense first, cash is king

Faced with such a highly volatile and high-risk market environment, the old strategies of "buying tech stocks with eyes closed" or "60/40 equity-bond balance" may no longer be effective.

1. Embrace "risk-free returns" and shorten bond duration

When the yield on long-term U.S. Treasuries breaks above 5%, the logic of capital changes. You no longer need to risk the stock market to chase uncertain returns. It is recommended to prioritize allocation to short-term government bonds or high-grade money market instruments. This not only allows you to lock in the currently attractive risk-free interest rate but also effectively hedges the risk of price declines caused by continued upward long-term interest rates.

2. Increase allocation of gold and energy to hedge against stagflation risks

Against the backdrop of geopolitical conflicts (such as the Strait of Hormuz crisis) and sticky inflation, traditional safe-haven assets remain effective.

Gold: Although temporarily suppressed by high interest rates, gold's safe-haven nature quickly returns once economic stagflation or financial market turmoil occurs. It is recommended to gradually allocate physical gold or gold ETFs at relatively low levels.

Energy stocks: Oil prices carry higher upside risk. Traditional energy giants with ample cash flow and stable dividends (such as ExxonMobil, Chevron, etc.) are good defensive choices and can provide you with confidence to hedge against inflation.

3. Be wary of overvalued growth stocks and pay attention to cash flow

For U.S. stocks, especially those with no real earnings backing and relying solely on storytelling, it is recommended to firmly avoid them. If you must hold equity assets, look to industry leaders with strong moats and ample free cash flow. In the future era of "capital cost repricing," only real cash profitability will be the hard currency that can weather cycles.

The current market is moving from the "liquidity-driven era" of the past decade into a brutal "capital cost repricing era." Don't be fooled by the new highs on the surface of US stocks, nor underestimate the warning signals from the bond market.