Bonds worry, while stocks enjoy the "bliss trade"

"Central to this thinking is that any real geopolitical shocks will be offset by government spending, Gopinath, now a professor at Harvard University, wrote in the Financial Times. That's what happened in the 2022 energy shock - when European governments spent to help cover energy costs for households. Or during the pandemic, when the U.S. government spent trillions of dollars supporting people and companies through the crisis, driving huge amounts of growth."

"It's a belief in the strength of the economy based on the experience of the past several years. Markets are pricing in the idea that fiscal policy will come to the rescue - even though with debt levels higher, that's not a sure bet. The disconnect between the stock market and other assets has become the story of the war."

"A lot of this is about AI. Investors are looking past the risk of the war and pushing stocks to all-time highs on tech optimism and on better-than-expected earnings. The S&P 500 is currently on track for a seventh straight week of gains. On Thursday, investors pounced on a new AI stock, the chipmaker Cerebras Systems, driving its shares up 68%."

"To be sure, bond investors and stock investors see the world differently. Bond investors just want to get paid back, with interest. So they tend to be more conservative, pricing in risks like the energy shock from the Iran war and rising levels of government debt. Stock investors tend to be more gung-ho and focused on growth (AI, yeah!), and are willing to put up with more risk and volatility."

Stocks are being driven by expectations of a “bliss trade,” where equities keep rallying even as bond markets price more inflation risk. The core assumption is that geopolitical shocks will be offset by government spending. Examples include European energy support in 2022 and large U.S. pandemic spending that supported households and companies and boosted growth. Markets reflect confidence in fiscal policy as a stabilizer, even as higher debt levels make outcomes less certain. The war has coincided with a disconnect between equities and other assets, including oil. Investors are also focused on AI, pushing tech stocks to highs and reacting strongly to new AI-related companies. Bond investors remain more conservative, emphasizing repayment and interest while pricing energy shock and rising debt risk.

Read at Axios