US stocks could be on the verge of a new rally as bond pessimism reverses and yields plunge amid fresh conflict in the Middle East

• Bond pessimism is turning around, and that could mean a stock rally is coming, Ned Davis Research said.
• Yields are turning lower and stock prices are climbing, while the Israel-Hamas conflict continues overseas.

Stocks could soon see a fresh rally as investors' pessimism on bonds appears to be changing course, according to Ned Davis Research.

In a Wednesday note, strategists led by Tim Hayes, the chief global investment strategist at NDR, said falling bond yields are a positive sign for equities, and that the market currently reflects less equity pessimism than bond pessimism.

"The bond price rebound in response to the Middle East conflict may be a sign that the sentiment reversal is underway, with yields heading lower and stock prices higher," the strategists said.

The DSI Global Stock Market Sentiment Composite suggests the sentiment reversal is already underway. According to the research group, the best returns tend to happen once the global composite has climbed out of excessive pessimism mode.

Should stock market sentiment continue to improve from recent lows, it would signal that investors no longer expect bond yields to keep advancing, in NDR's view. Plus, it would mark a response to growing evidence of an economic soft landing and the prospect of a strong third-quarter earnings season.

Gold prices are also pointing to a climb out of excessive pessimism. Declining yields and reversing bond sentiment would support the precious metal, the strategists said, as bond yields have a stronger inverse correlation with gold than equities.

Meanwhile, the US Dollar Index has an even stronger inverse correlation with gold than with equities.

"Reversing bond sentiment and bond yields," NDR said, "may not only be the catalyst for a continuing reversal in equity sentiment and a strengthening uptrend, but also the trigger for a rebound in gold sentiment and the gold price, accompanied by a downturn in dollar sentiment and a weakening dollar."

US stocks have climbed this week, with the Dow Jones Industrial Average on pace for its fourth consecutive day of gains. Treasury yields have moved lower from 16-year highs reached last week, during the bond market's historic sell-off.

Overseas, investors continue to monitor developments in the ongoing Israel-Hamas conflict.