Even after the worst week for US equities since early December, it’d be hard to call bears “vindicated.”

Given the general tenor of my recent commentary, I suppose I’m a “bear,” although I’d suggest any efforts to put a label on my daily editorializing belie my general indifference to near-term market direction.

The question continues to be whether stocks have truly internalized the dramatic shift in Fed expectations.

The terminal rate rethink triggered by January’s NFP fastball was a game-changer. Or at least it should’ve been. The fact that it still hasn’t manifested in a truly meaningful downdraft for stocks suggests equities are mis-priced.

You can criticize stocks in a variety of ways based on relative value and fundamentals. The ERP is too low+, this year’s re-rating makes no sense+, the ongoing collapse in earnings growth expectations has the PEG ratio in nosebleed territory, and so on.

All of that’s compelling, but to me, the real issue is the discernible absence of a reaction to the wholesale shift in Fed expectations.

The familiar figure above is updated through Friday’s close. As reminder: The market turned on October 13, ironically in conjunction with a hot September CPI report which was perversely accompanied by a dramatic bullish 194-point intraday reversal for the S&P.

The rally that began that day is still largely intact. The S&P is up nearly 11% since then, even as terminal rate expectations are now 60bps higher.

Stocks have started to notice — in the visual, the green shaded area is now headed lower, as the rally fades with ever higher expectations for peak Fed funds. But the nascent weakness in equities feels wholly inadequate given the scope of the repricing across the US rates complex.

Further, it’s less and less obvious why you’d take the risk. Even after this week’s swoon, the S&P trades at 18x forward profits. The backward-looking PB ratio is the highest in history if you don’t count the pandemic boom or the dot-com bubble.

All of that, at a time when T-Bills get you nearly 5%, and the spread between the S&P earnings yield and two-year Treasurys has collapsed from 700bps at the height of the original pandemic meltdown to what may as well be nothing.