If last year’s cross-asset malaise taught us anything, it’s that no correlation, no matter how reliable, is an immutable market truth.

For many, the idea of bonds as the potential sponsor of a market event seemed far-fetched. The notion that bonds might become a correlated asset and a source of portfolio volatility likewise sounded too bad to be true.

Generally speaking, savvy market participants did appreciate the perils inherent in a dozen years of ultra-accommodative monetary policy that served to extinguish price discovery, particularly in fixed income. Relatedly, serious observers understood that central banks’ large footprint in bond markets increased the risk of so-called “fragility” events. But the macro backdrop remained favorable for bonds as disinflation proved mostly intractable and policymakers persisted in asset purchases and forward guidance with an eye towards suppressing rates volatility in perpetuity.

The tail risk was always inflation. Everyone knew that too, but it just wasn’t clear where the inflationary impulse would come from in a disinflationary world. When two tail events (the pandemic and the war) ushered in the return of inflation, the correlation assumption that underpinned everything from your retirement portfolio to complex iterations of risk parity, suddenly went bad, rates vol took off and the rest is history.

The question now is whether the macro shift that defined the first three years of the 2020s is here to stay. If it is, that’s bad news for equity investors accustomed to 21st century dynamics.

This is well-worn territory, but I wanted to recap it in the interest of highlighting the visual below, from SocGen, which shows that the relationship between rates vol and the S&P’s forward multiple is stronger in the post-pandemic era.

“One of the ways in which higher rates volatility seems to affect equities is via the valuations channel,” the bank’s Jitesh Kumar and Vincent Cassot said, noting that valuations bottomed when 10-year vol peaked in October.

The multiple story (i.e., the valuation debate) is critical. Long-duration, hyper-growth, high-multiple shares were the hardest hit as bonds sold off and the Fed leaned in. Of course, the “broad” US equities market is effectively a leveraged, long-duration bet, which means that unless and until there’s a leadership change in the cap-weighted benchmarks, an unruly bond market prone to periodic paroxysms will be an albatross. And the fate of bonds is tethered to, and inextricably bound up with, the macro.

That’s the equity valuation-rates-macro nexus, and it’s at the heart of calls for a permanent de-rating in stocks assuming the 2020s macro shift proves durable. BofA’s Michael Hartnett has been on (and on) about this, and he reiterated it late last week using the familiar chart below.

The light blue lines are trailing multiple averages, and Hartnett typically divides modern history into two distinct PE regimes. The first persisted for the entirety of the 20th century, and the second began with the tech bubble, and can generally be thought of as the regime which coincided with consistently negative stock-bond return correlations and everything we came to regard as “normal” over the past two decades.

Hartnett’s contention is that if inflation ends up running 3-4% in perpetuity, and rates are set accordingly, a 20x PE for the S&P 500 isn’t feasible. Instead, he’s argued, a “20th century” multiple of 14-15x is more appropriate.

As ever, it all comes back to the same, much larger, debate. If hyper-globalization and The Great Moderation inaugurated a “new normal,” then perhaps 2020-2023 will be remembered as an unfortunate series of anomalies which quickly gave way to the status quo. If, however, hyper-globalization and The Great Moderation were themselves the anomalies, then we may look back on the 2020s as the decade when humanity (and, less importantly, equity multiples) reverted to a more natural state.