The Roth Report: Who Blinks First: Equities or Rates?

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The Roth Report: Who Blinks First: Equities or Rates?

May 17, 2026

Who Blinks First: Equities or Rates?

Strong equity markets (outside of Friday’s sell-off), upside inflation surprises, and resilient growth likely cannot coexist

indefinitely. Something eventually has to give. The core tension in markets is that rates increasingly reflect a higher-

for-longer inflation regime, while equities continue to price a far more benign outcome. Our bias is that rates likely

continue repricing higher until either growth weakens, equities begin to crack more materially, or Trump reaches

his pain threshold and takes a deal with Iran.

We are increasingly cautious on risk assets because rates likely cannot continue moving materially higher alongside

equities, while the most plausible paths to lower yields are not especially constructive for markets: 1) growth

disappoints, 2) equities weaken enough to trigger a broader risk-off move, or 3) Trump reaches his pain threshold and

de-escalates the war in Iran. We likely have not reached option three yet, while the first two scenarios are not particularly

supportive for risk assets. At the same time, persistent upside inflation surprises (driven increasingly by the war in Iran

and AI-related capex/memory demand) are pushing inflation forecasts higher, leaving the Fed a long way from being

able to calm markets.

In today’s note, we discuss the increasingly challenging setup for risk assets over the coming weeks and revise our Fed

call, pushing back all expected rate cuts until H2 2027.

The move in bond yields turned a bit ugly on Friday, beginning in Japan with hot PPI data before spreading to the UK,

which is once again facing concerns around government instability, and then radiating across the broader global bond

market.