Mike Wilson nailed it.

Or as much as you can nail it after sitting out the first half of a historic five-month risk rally and adopting an ambivalent attitude towards the rest of it.

A few weeks ago, Wilson suggested that if 10-year US yields broke above 4.35%-4.40%, equities would notice and multiples would compress.

One of the defining characteristics of 2024’s rally is (or was, past tense, if you believe last week’s pullback presaged a proper correction) equities’ disregard for rates. The juxtaposition between nearly two-dozen new S&P records and fading 2024 Fed cut odds is the clearest manifestation of that phenomenon, but you can illustrate it using twos, 10s or dollar strength.

To quote from “Two-Way Risk,” the latest Weekly, a key pillar of the bull case for US stocks was the notion that no matter how resilient the economy turned out to be, the worst case scenario for 2024 on the policy front was the dot plot-implied three insurance cuts. Stocks noticed, but were willing to countenance, market pricing for between two and three cuts. Once that pricing reflected fewer than two quarter-point reductions for all of 2024, the pillar started to crack.

The figure above shows current market pricing for 2024 Fed cuts versus the dot plot. At the dovish extremes, the market was looking for nearly 100bps of “extra” easing versus the median 2024 dot. Coming into this week, market pricing implied ~35bps less easing versus the 2024 marker from the March SEP.

That re-pricing’s the crux of the issue. It reflects CPI overshoots, ongoing US economic resilience and the read-through of that macro strength for a Fed which is once again seeing its best-laid plans derailed.

As noted above, the same dynamic’s observable in Treasury yields and the dollar and Wilson’s contention was that 4.40% was the pain threshold for 10s beyond which stocks would de-rate. That proved prescient.

As the figure shows, Mike nailed this one. A week and a half (give or take) after he really started to pound the table on the 4.35%-4.40% range as a potential breaking point for the equity rally, yields rose sharply and the S&P de-rated in an almost straight line.

“We believe equity markets have been trading poorly in April primarily due to the repricing of Fed cuts and the subsequent rise in back-end rates,” he wrote Monday.

So, what does the future hold for equity multiples suddenly awake to their rates sensitivity? Well, as Wilson acknowledged last week, it’s actually not so much about any specific level on rates, but rather the rapidity of a given move. He ran a few regressions and settled on a six-month rate of change. This week, he used that analysis to illustrate how the index multiple might evolve over the near-term.

“From here, the backdrop looks more challenging,” he said, editorializing around the figure above.

If 10-year yields loiter near current levels, multiples should compress “modestly” (Wilson’s word) late next month and into June, before re-rating later this summer. If 10s were to rally to 4.25%, multiples would meander before ultimately re-rating north of 20.5x.

If, on the other hand, 10s were to sell off to ~5% in linear fashion, stocks have “more meaningful valuation downside through June followed by a more modest recovery in July,” as Wilson put it.

Any way you cut it (or don’t cut it, if you’ll pardon the bad policy joke), it’s up to earnings now. “With 10-year yields now well above our key 4.35%-4.40% level, stock appreciation from here will largely have to be earned,” Wilson said. You can take “earned” figuratively and literally.