People pass the front of the New York Stock Exchange in New York on March 21. Stocks are rising on Wall Street, including the banks most beaten down by the industry’s crisis. Peter Morgan/Associated Press

Wall Street got more signs the Federal Reserve’s war against inflation isn’t breaking the economy – or at least not yet – with traders sending Treasury yields soaring amid bets on further tightening.

Bonds sold off across the curve, with two-year yields jumping 15 basis points to 4.86%. Swap markets now indicate a nearly 50% chance of a second Fed hike by year-end. The dollar climbed. The S&P 500 posted a mild advance, with equities facing a lot of instability as traders adjust their positions at the end of the quarter.

Banks led gains as the biggest lenders passed the Fed’s stress test, clearing the way for payouts. Wells Fargo and JPMorgan Chase climbed at least 3.5%. The Nasdaq 100 underperformed after soaring over 35% this year, buoyed by the artificial intelligence hype. Micron Technology slid on concern the chipmaker faces a slow recovery from an inventory glut. The Russell 2000 Index of small caps climbed 1.2% in its fourth straight advance.

Thursday’s readings on jobless claims and the gross domestic product showed the U.S. economy is in better shape than many had envisioned at the start of 2023. While key gauges of inflation closely watched by the Fed have been revised down slightly, they remain well above the central bank’s 2% target.

“The market is processing the recent strength in the economic data in both positive and negative ways,” said Carol Schleif, chief investment officer at BMO Family Office. “Solid economic data means that the economy is more resilient, but it also emboldens the Federal Reserve to keep raising interest rates.”

Schleif noted that it’s very plausible that the Fed boosts interest rates in July – and perhaps again in September – especially if the economic data remains strong and if second-quarter earnings are better than expected.

Market rate bets are aligning with Fed Chair Jerome Powell’s view that at least two hikes are likely necessary this year – and that acting at consecutive policy meetings isn’t “off the table.”

To Fawad Razaqzada at City Index and Forex.com, the fact that the economy continues to defy expectations should keep the doves at the Fed quiet for another couple of months at least.

“But the potential for interest rates to remain higher for longer is something that could ultimately haunt investors,” he noted.

After Thursday’s data came out, the U.S. curve inversion intensified – with longer-dated yields rising less than shorter-maturity ones.

That means: the economy may look stronger now, but investors expect the Fed’s rate increases to curb future growth, which could boost the risk of a recession down the road.

Despite all the jitters around a potential downturn and elevated inflation, the S&P 500 is close to wrapping up the first half of 2023 with a rally of about 15%. Traders have also climbed a wall of worry amid the collapse of some regional banks, geopolitical risks, and the debt ceiling debate.

And history suggests the bullish momentum could continue according to Adam Turnquist, chief technical strategist at LPL Financial. Since 1950, first-half gains of 10% or more have been followed by an average rally of 7.7% in the second half – with positive results 82% of the time, he noted.

While there could be some bumps along the way, the good news is that drawdowns in the second half tend to be shallower after a positive first half. In addition, a pullback in stocks could give investors “a buying opportunity into this new bull market,” Turnquist added.

Meantime, short sellers are stepping up bets against the largest technology companies at the heart of this year’s market gains, a sign that investors are growing more skeptical of the massive rally.

Short interest as a percentage of shares available to trade is near 12-month highs for Microsoft, Tesla, and Amazon, according to data compiled by S3 Partners. In the past 30 days, traders have added to positions that would profit from declines in the shares of Apple to the tune of about $1 billion.

“Large-cap equities and mega-cap tech names have jumped higher, providing a degree of relief for investors,” said John Lynch, chief investment officer at Comerica Wealth Management. “We remain concerned, though, that these moves are beyond optimism over growth prospects for AI, for example, and instead reflect misguided hopes for a change in the direction of monetary policy.”

Lynch expects the Fed to remain steadfast in its policy pursuits, with elevated rates and tighter credit standards weighing on the economy for the remainder of the year.