Just noticed something interesting in how the market is digesting the Iran situation. Stocks are having their best run in years while bonds are basically stuck in neutral. The divergence between stocks and bonds right now is pretty wild when you think about it.

Here's what's happening: The S&P 500 just posted a 9.8% gain over 10 trading days—strongest stretch since the pandemic rebound back in April 2020. Meanwhile, Treasury yields barely budged from their war-outbreak levels. Oil's still the dominant macro driver, but the transmission mechanism has completely changed. Stocks are showing real decoupling from oil prices now, while bonds remain almost perfectly correlated with crude moves.

The bond market is basically trapped. Before the war, yields were already artificially suppressed by everyone betting on aggressive Fed cuts and a weakening labor market. That narrative has completely fallen apart. The latest employment data keeps showing resilience, which nobody was really pricing in. So now you've got inflation expectations dominating bond pricing—higher oil means higher yields, and bond holders are just taking it on the chin.

But here's why stocks are handling it differently: Corporate profits are nominal figures. When inflation picks up, earnings just scale up automatically. Q1 profit growth for the S&P 500 is tracking toward 19%, way above consensus. That natural cushioning effect doesn't exist for bonds. Fixed-rate cash flows don't adjust for inflation, so rising oil prices directly hit discount rates and tank valuations.

Add fiscal expansion into the mix and you've got an even wider stocks vs bonds split. War means more government spending—energy subsidies in the short term, defense and energy independence investments long-term. That increased bond supply pushes yields higher and pressures prices. But equities see fiscal spending as demand support, especially for defense and energy plays.

Now, before you get too comfortable with this stocks vs bonds divergence, there's a catch. Oil prices are still the key variable. The negative correlation between S&P 500 futures and Brent crude has narrowed but hasn't actually reversed. If oil spikes again or employment data shifts Fed expectations, this whole pattern could reset pretty quickly. Short-term, equities have better resilience, but we're still one shock away from testing this setup.