What the S&P 500's Longest Rally Since 2023 Says About Rate Expectations

The S&P 500 is putting together its longest weekly winning streak since 2023, according to Bloomberg, but here's what's actually interesting: two-year Treasury yields just hit their highest level since February 2025. That's the kind of divergence that tells you something about what the market expects from the Fed.

Fed Governor Christopher Waller said out loud what the bond market's been pricing in for weeks. The next rate move is just as likely to be a hike as a cut. That's a pretty significant shift from where the narrative was at the start of the year, when everyone was counting down to multiple cuts. Stocks are rallying anyway, and the bond market is basically saying "we don't believe you're cutting anytime soon."

Two-year yields are the Fed expectation indicator. When they move, it's because the market is repricing what the Fed's going to do over the next 12-24 months. They're at February 2025 highs right now, which means the bond market thinks rates are staying higher for longer, or possibly going higher.

That matters because usually when bond yields spike like this, stocks pull back. The logic is simple: higher rates make future earnings worth less today, and they make bonds more attractive relative to stocks. But that's not what's happening right now. The S&P 500 is rallying through it, which tells you the market thinks corporate earnings can handle higher rates, or that the economic data is strong enough to justify both.

This is the kind of setup where you want to watch the relationship between the two. If yields keep climbing and stocks stall out, that's when the divergence starts to matter. If stocks keep rallying and yields flatten, that's different. Right now it's just tension.

There are a few reasons the S&P 500 might be rallying even with yields pushing higher. First, earnings have been solid. If companies are beating estimates and raising guidance, the market can absorb higher rates as long as growth stays intact. Second, sentiment shifted hard after the Iran talks news earlier this week, and when geopolitical risk comes off the table, equities tend to catch a bid regardless of what's happening with rates.

The other angle is positioning. If everyone was positioned for rate cuts and dovish Fed policy, and now that narrative is flipping, there's probably some short-covering and repositioning happening. That can drive rallies that don't make intuitive sense based on fundamentals alone. It's mechanical.

But here's the thing. This kind of rally, where stocks are climbing while yields are rising, doesn't usually last forever. Either yields pull back because the Fed signals something dovish, or stocks start to care about the higher discount rate. One of those two things tends to give. The question is which one and when.

The setup right now is pretty straightforward. You've got a strong equity rally, rising bond yields, and a Fed that's signaling neutrality instead of cuts. That's a recipe for volatility if any one of those variables changes.

Watch the two-year yield. If it breaks above the February 2025 high and keeps climbing, that's the bond market pricing in a potential hike, not just a hold. That's when the equity rally probably stalls. If it backs off and drops below current levels, that's the market repricing for a more dovish Fed, and the rally probably extends.

On the equity side, watch the S&P 500's reaction to economic data over the next few weeks. If GDP, inflation, or employment numbers come in hot, that supports the higher-for-longer narrative and keeps yields elevated. If the data softens, that gives the Fed room to shift back toward cuts, which would be bullish for stocks and bearish for yields.

The other thing to keep an eye on is sector rotation. When yields rise and stocks rally, you usually see rotation into cyclicals, financials, and energy, and out of growth and tech. If that's happening, it confirms the market believes the economy can handle higher rates. If tech keeps leading and defensives lag, that's a different story.

This is also one of those setups where the behavioral gap between analysis and execution shows up. The analysis says rising yields and rallying stocks is tension that usually resolves one way or the other. But executing on that is tricky because you don't know which direction it breaks or when.

The temptation is to either go all-in on the rally because momentum is strong, or sit out entirely because the divergence feels unsustainable. Both are emotional responses to uncertainty. The mechanical approach is to watch the key levels, define the if/then scenarios ahead of time, and let the market tell you which way it's breaking instead of trying to predict it.

If you're long the rally, your risk is defined by where yields are and what happens if they spike further. If you're waiting for a pullback, your risk is that the rally extends and you miss it. Neither is wrong, but both require a plan for what changes your mind.

Setups like this, where fundamentals and price action are sending mixed signals, are where market structure and volume analysis matter more than narratives. The S&P 500 is in an uptrend. That's the structure. The two-year yield is rising. That's the structure. Those two things are in tension, but until one of them breaks, the trade is the trend.

The mistake traders make here is trying to be too smart about it. "Stocks should pull back because yields are rising" is a narrative. It might be right eventually, but it's not a trade. The trade is what the structure says, which right now is long until proven otherwise. If the S&P 500 breaks support or yields spike hard enough to trigger a rotation, then the structure changes and you adjust.

That's the difference between analysis and execution. Analysis says this setup is tense and probably resolves soon. Execution says trade what's in front of you until it changes.