Conference Presentation, Interview
The return of correlations
Bank of AmericaRalf Preusser, Jill Hall, Chintan Kotecha, Jill Carey-Hall, Bruno Brazegna, Paul Sianna
- S&P 500 is projected to reach a 12-month target of $7,800 with modest upside, supported by a current year earnings growth forecast of 33 percent expected to decelerate to 12 percent in the subsequent year.
- Historical precedents suggest 5 percent pullbacks occur three times annually and 10 percent corrections happen once a year, with the last correction occurring in spring 2025; the period from September to October is historically identified as the market's weakest two-month window.
- U.S. equity bull cases rely on a continuing productivity boom, while corporate balance sheets are assessed as healthy with net debt to EBITDA below average and 80 percent of S&P 500 debt classified as long-term fixed.
- Asset allocation shifts are anticipated when the 10-year Treasury yield reaches 5.5 percent, with negative correlation between S&P 500 returns and rates emerging above 6 percent and PE multiple compression likely at 7 percent.
- Volatility repricing is driven 75 to 80 percent by uncertainty regarding low components, with a broader repricing of policy, inflation, and duration risks expected to follow.
- The MOVE index historically dictates risk asset returns, showing a deeply negative impact during top quartile readings and positive returns when below that threshold, an effect that has intensified significantly over the last five years.
- Systematic CTA strategies hold a short position in the entire U.S. Treasury curve that is larger than the 2022 levels, with 114 percent short exposure in notional terms and an industry-wide short estimated at $280 billion in 10-year equivalents.
- Technical levels for the Treasury curve are critical, as the front end, belly, and long end are within a few basis points to 15 basis points of triggering model stops, with a potential "pain trade" scenario defined by falling yields, dropping equities, and weakening dollar and oil prices.
- Equities face potential systematic selling pressure estimated at $86 billion globally in a single week if the NASDAQ drops 1.5 percent, while a bearish unwind involves CTAs rebuilding shorts rapidly if yields rise again.
- Technical analysis indicates the 10-year yield remains in an uptrend with no top patterns confirmed, projecting a textbook target of 5.75 percent and a rational outcome of 6 percent or higher based on exothermic triangle patterns formed in March 2026.
- Oil prices are forecast to bottom in 2026 with targets reaching $100 and subsequently $129, a move expected to provide an additional lift to yields, with a next wave of yield increases anticipated in Q4.
- A median term view supports higher rates, favoring re-engagement on a short bias between 5.02 percent and 4.92 percent, with scenarios suggesting a potential decline to 4.81 percent in the event of a washout before the two-year yield targets new cycle highs.