Recalcitrant stocks are “baffling” Wall Street, declared a Bloomberg headline.

It was an accurate, if slightly overwrought, description of the current market conjuncture. Equities steadfastly refuse to succumb in the face of an extreme hawkish repricing across the US rates complex, where expectations for peak Fed funds have risen some 40bps this month, while the implied odds of meaningful easing in the back half of the year have receded.

As I put it in Friday’s weekly+, it’s important to acknowledge that the “Stocks aren’t listening!” refrain isn’t unique to these circumstances. Some version of that shrill lament has been a mainstay of market pontification for as long as I’ve been alive. At any given time, in any given market or macro environment, some bear, somewhere, is complaining about oblivious equities.

Still, the same kind of hawkish rates repricing we’re seeing now was the sponsor of last year’s historic 60/40 drawdown, and 60/40’s revival in January+ owed much to ongoing dovish assumptions about the Fed trajectory. So, unless last year’s drawdown was sufficient to inoculate stocks from higher rates (call it herd immunity for bulls), then the disconnect between bonds and stocks observed in February runs the risk of “resolving” itself with lower equities.

Note that the rebound from the October lows on the S&P is almost wholly intact, despite terminal rate pricing that’s nearly 50bps more aggressive.

For most of the recovery in equity prices, terminal rate expectations were steady. From the beginning of the rebound (which paradoxically began with a dramatic bullish reversal on Wall Street following the release of a hot September CPI report) through February 2, the day before the January jobs report changed the game, terminal rate pricing was, on average, less than 10bps above where it sat on October 12. As of late this week, it was between 40bps and 50bps higher.

It could be that stocks were prepared for this all along. After all, even three additional 25bps Fed hikes wouldn’t likely be enough to make the real Fed funds rate stick out as especially onerous, unless you assume a very sharp deceleration in inflation over the next four months, which would be an exercise in question-begging on several fronts (if inflation were to suddenly plummet, you wouldn’t need those hikes, and stocks would be justified in rallying, etc.).

It may also be that equities are conflating the “no landing” narrative with a “Goldilocks” conjuncture, which I’d argue would be a mistake. “Goldilocks” is slower, but still reasonable, growth and decent labor market outcomes, along with steady disinflation. “No landing,” as we’ve experienced it so far anyway, is hot labor market outcomes, robust nominal spending and nascent signs that the disinflationary impulse is waning. Admittedly, all of that’s based on one month’s worth of macro data. By this time next month, we could be looking at an entirely different picture.

One way or another, though, it seems reasonable to suggest the odds of an imminent stock swoon are elevated. The February FOMC minutes are due next week. When given the opportunity to push back on the early-year rally in financial assets during the press conference on February 1, Powell failed to reiterate the message from the December FOMC minutes, which contained a rare rebuke of markets. It’s possible the February minutes will contain similar language.

Finally, note that if the data continues to surprise on the hot side going forward (and I fully acknowledge that’s a big “if”), any additional hawkish repricing across rates could get an r-star kicker, either via gentle allusions to a higher long run rate from Fed speak or a dot shift. That’d risk another 60/40 drawdown.