At that time, I realized the market was overlooking something important. While the stock market has recovered quickly from the war shock, the bond market is still hesitating. The reasons behind this phenomenon are actually quite interesting.

The S&P500 rose by 9.8% over those 10 business days, recording its strongest gain since the pandemic era. Meanwhile, as for the yield on U.S. bonds—after the outbreak of the war, it had only bounced back by a small fraction of the initial rise. Why did the reaction differ so much?

The root cause was a bias in pre-war pricing. At the time, the market was valuing U.S. bond yields far too low. It had an overly pessimistic view of the macro impacts of AI, and it was factoring in the weakness of the labor market too early. Even though the Fed’s sizable rate cuts had already been sufficiently priced in, the data that came out afterward did not support that. The ADP employment report showed resilience in the labor market, and the market’s prior expectations turned out to be wrong.

Unlike bonds, the stock market has some tolerance for moderate inflation. This is an important mechanism that supports the divergence between stocks and bonds. Because corporate earnings are nominal figures, they expand automatically when prices rise. At the time, the S&P500’s first-quarter earnings growth rate was expected to reach 19%, and this solid earnings strength was acting as a cushion against the oil shock.

Bond cash flows from fixed-rate securities are not adjusted for inflation. When oil prices rise and inflation expectations increase, the discount rate rises directly, causing bond prices to fall. That’s the opposite reaction from stocks.

Another factor you shouldn’t overlook is expectations for fiscal expansion. War leads to higher government spending. In the short term, subsidy policies may be used to protect consumers from energy prices, and in the medium to long term, structural increases in spending on defense investment and energy independence are possible. If fiscal spending increases, the supply of government bonds increases as well, which directly pushes down bond prices and raises yields. Meanwhile, for stocks, fiscal expansion works as a factor that supports underlying economic demand, and it is especially positive for defense and energy-related sectors.

However, caution is needed. The current relative strength of stocks is the result of these three logics being repriced, not a permanent decoupling from oil prices. Both the stock market and the bond market will continue to maintain a high sensitivity to oil prices.

Looking at correlation data between S&P500 futures and Brent crude oil, the negative correlation between the two has eased slightly, but there has been no fundamental reversal. In other words, if oil prices surge sharply again, or if employment and inflation statistics change the Fed’s policy outlook, the current pattern of divergence between stocks and bonds will be tested again. Stocks may have relative resilience in the short term, but don’t forget that the market environment is always fluid.