Stocks have a bond problem. Maybe you noticed.

US equities — and stocks more generally, although at this point to talk about “stocks” is just to talk about US shares — came into the new week under pressure, and it was no secret why: Rates are raging in the new year.

Long-end yields have pressed higher, and an outperforming US economy now threatens to nix additional Fed cuts, at least until the back half of 2025. Equities trading on dot-com-esque valuations appear to have reached a limit with the selloff in bond land.

I talked about this at some length in the latest Weekly, but the figures below, from Morgan Stanley’s Mike Wilson, underscore the point. He used the same charts last week, but they’re updated for Monday.

The figure on the left’s straightforward: When benchmark US yields approached the highs seen during last year’s early-year inflation re-heat, the S&P’s forward multiple came under pressure and ultimately contracted two turns (and counting).

The figure on the right shows you the correlation flip. Suffice to say it was “decisive,” as Wilson aptly put it.

“[I]nterest rate sensitivity has returned as a key driving force for equity markets [and] Friday’s hot payroll report furthered that development, acting as a headwind for valuation across equity markets,” Wilson wrote, adding that stocks should continue to “take [their] cue[s] from the rates market.”

At one point Monday, market pricing reflected just ~23.5bps of easing for this year, which is to say traders are now beginning to question whether the Fed will cut rates at all in 2025.

As the familiar figure reminds you, markets saw as much as 150bps of cuts this year at the extremes.

“It certainly isn’t wasted on us that the remarkably strong employment report has, yet again, provided the FOMC with sufficient cover to delay further rate cuts in the event of sticky inflation during the coming months,” BMO’s Ian Lyngen said.

“[S]entiment regarding the Fed’s path toward normalized policy rates has clearly taken a hawkish turn,” he added, before reminding market participants, as I did late last week, that “shifts in opinion” on the likely course of Fed policy “can just as quickly be reversed.”