MW Why a 'meaningful' selloff for stocks is needed to bring down bond yields

By Barbara Kollmeyer

BCA Research sees a 'collision course' ahead

Bond yields won't cool down meaningfully until stocks take a bigger hit, argues BCA Research.

No big boost looks in store from Nvidia's first-quarter results, which mark the end to the Big Tech earnings season. With that major event aside, the focus for investors may shift back to the Iran war and the energy crunch driving inflation and bond yields higher.

While yields have cooled off just a tad recently, thanks to some ease in oil prices, little has changed - the war drags and the U.S. and Iran are exchanging fresh threats.

Strategists have been warning that the recent selloff in bond markets presents a huge challenge for this AI-powered bull market , especially if the 10-year Treasury yield reaches 5%.

Our call of the day from BCA Research strategist Arthur Budaghyan sees a "collision course" ahead for equities and bonds that has just one fix: "Only a meaningful equity selloff is likely to pull bond yields considerably lower. Global equity risk-reward looks poor," he said.

Explaining further, Budaghyan said that over the last 30 years, whenever the two-year U.S. bond yield has crossed above the Fed funds rate, as it has recently done, the central bank has hiked. The reverse has also been true.

"The negative correlation between U.S. share prices and 10-year bond yields might not persist. However, for now, rising interest rates are quite negative for the equity market," he said.

The strategist doesn't see bond yields - closely linked with energy prices this year - coming down as long as the Iran crisis keeps dragging on, which looks to be the case. And with rising energy costs pressuring inflation, that's a dilemma for the Fed, which will likely see a negative reaction from stock investors whether it raises rates or leaves them unchanged. Its language is bound to become more hawkish, he said.

"In fact, if the Fed does not hike, the bond market might sell off even more. That is because when inflation is rising and economic growth is robust, the longer the central bank delays rate hikes, the more it must raise rates at a later date. In other words, a central bank falling behind the inflation curve is bearish for stocks and bonds," he said.

Meanwhile the correlation between U.S. bond yields and share prices turned negative at the start of the year, meaning that when yields go up, stocks turn lower. And that relationship remains crucial for investors currently.

"U.S. bond yields will continue to rise if the U.S. stock market rally persists. Conversely, if U.S. share prices tumble, U.S. bond yields might decline," he said, offering this chart showing that over 40 years, bear markets for U.S. bonds didn't halt until major turmoil for the economy or financial markets. "This time is unlikely to be different."

With the wealth effect from Americans' vast holdings of stocks - at a record 250% of disposable income based on Federal Reserve Flow of Funds data - rising stock prices have been driving consumer spending. Rising equity prices have also kept the spending machine whirring when it comes to AI hyperscalers' capital investments.

"Therefore, a drop in U.S. equity prices is needed to unleash disinflationary forces in the broader economy and counteract the inflationary impulse from higher oil and food prices," he said.

A stock selloff may not quite gel with the forecasts making the rounds on Wall Street lately. Yardeni Research recently boosted its end-year target for the S&P 500 to a Wall Street high of 8,250.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are mostly pushing lower, led by tech, as the 10-year yield BX:TMUBMUSD10Y is pushing north, currently at 4.61% and oil prices (CL.1) (BRN00) are higher.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              7432.97    -0.15%  4.13%   8.58%   27.18% 
   Nasdaq Composite                                                     26,270.36  -0.50%  6.54%   13.03%  39.20% 
   10-year Treasury                                                     4.578      8.90    24.90   40.60   3.80 
   Gold                                                                 4533.7     -2.61%  -3.72%  4.65%   37.59% 
   Oil                                                                  97.77      -4.17%  0.79%   70.30%  60.78% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Nvidia (NVDA) gave an upbeat outlook and lifted its dividend, but shares are not budging.

SpaceX has filed for its IPO, aiming to raise $80 billion and list as soon as June, but has also warned of "significant indebtedness."

Shares of Rocket Lab (RKLB) slumped after that news, with Voyager Technologies $(VOYG)$ and Firefly Aerospace $(FLY)$ also dipping.

Read: OpenAI could steal SpaceX IPO's thunder, with Sam Altman filing as soon as Friday

Walmart $(WMT)$ results are coming ahead of the open.

Intuit $(INTU)$ is sinking 13% after the tax-preparation company reported results and said 17% of workers will be let go.

Applied Digital shares (APLD) are climbing after the datacenter builder agreed to a $7.5 billion lease agreement with a U.S. hyperscaler.

Samsung shares (KR:005930) led a rally for Korean stocks, after a major worker union called off plans for a strike. LG Electronics shares (KR:066570) surged 30% after encouraging AI robotics comments from Nvidia CEO Jensen Huang.

Weekly jobless claims, housing starts and the Philly Fed manufacturing survey are due at 8:30 a.m. The S&P flash U.S. services and manufacturing PMIs are coming at 9:45 a.m.

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The chart

Rory Johnson, founder of CommodityContext.com posted this chart on X showing how the oil market has reacted to comments by President Donald Trump throughout the Iran conflict. As the chart shows, over time oil appears less sensitive to Trump's remarks about a potential deal to end the conflict that is now in its 12th week.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   MU      Micron Technology 
   AMD     Advanced Micro Devices 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   NIO     NIO 
   AMZN    Amazon 
   INTC    Intel 
   MSFT    Microsoft 

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Beyond the headlines

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-Barbara Kollmeyer

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May 21, 2026 07:04 ET (11:04 GMT)

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