By: Gustian Farrow, Head of StoneX TV • Content Channels
Vincent Deluard, StoneX Director of Global Market Strategy, joined Fiona Cincotta to discuss his bearish outlook for stocks, explaining why stagflation, bond yields, and global capital flows pose significant risks to investors.
Toward the end of 2024, Deluard identified what he termed a “collective hallucination” about U.S. economic exceptionalism. Markets were overly optimistic, pricing in robust growth, steady earnings, and manageable inflation, expecting the economy to navigate disruptions effortlessly. However, actual economic data soon challenged these assumptions, revealing that the past two years of unusually high returns and above-average GDP growth had likely set expectations too high—raising doubts about the potential for future upside surprises.
Within months, Deluard’s caution was validated. Equity indices corrected approximately 10%, while bond prices rallied amid escalating concerns about persistent inflation and economic slowdown signals. According to Deluard, this correction represents the initial stage of a broader bear market potentially totaling 20% or greater peak-to-trough declines.
Deluard emphasizes stagflation—a condition marked by persistent inflation despite sluggish economic growth—as a significant concern. Historically, low interest rates and abundant liquidity have supported elevated corporate valuations. However, he notes current hawkish monetary policies and ongoing inflation pressures are driving bond yields higher.
He specifically advises monitoring long-term Treasury yields as if the 10-year yield remains consistently above 4%, it could maintain downward pressure on equities. Additionally, term premium is an important factor to be mindful of, as increased demand for yield compensation on longer-duration bonds can signal tighter financial conditions, higher corporate borrowing costs, and pressure on equity valuations.
Deluard also points to pension fund rebalancing as a significant yet often-overlooked market driver. In the U.S., many retirement plans automatically rebalance asset allocations. When bonds outperform equities, pension funds must sell bonds and buy equities, creating a temporary boost in stock prices. While this “quarter-end” phenomenon can provide short-term market support, he believes that it isn’t a lasting structural benefit.
Another potential risk to U.S. markets is reduced foreign investment in American stocks and bonds. Rising geopolitical tensions, high valuations, and a strong U.S. dollar may prompt international investors to repatriate assets. Such steady capital outflows could gradually suppress U.S. asset valuations and dampen equity returns over time.
Despite his bearish outlook, Deluard acknowledges conditions that could lead to a more favorable scenario. For instance, a sustained drop in oil prices to the $50–$60 range could ease inflationary pressures, support consumer spending, and create a platform for more dovish central bank policies. The realization of this scenario would depend heavily on geopolitical developments and decisions by major oil producers.
Deluard expects a period of market consolidation as investors digest mixed economic signals. A temporary rebound in stocks may occur during spring and early summer, driven by technical oversold conditions and pension fund rebalancing. However, he warns that this relief may not last. Rising bond yields, reduced liquidity, and weaker corporate earnings could trigger a subsequent downturn, potentially pushing equity markets into a deeper correction exceeding 20% from peak to trough.
Amid market turbulence driven by trade disputes, inflationary pressures, and geopolitical concerns, Deluard offers a critical reminder that market corrections unfold gradually. While stagflation, foreign capital movements, and elevated bond yields suggest the possibility of a deeper bear market, investors can remain cautiously optimistic if certain economic indicators shift positively. Ultimately, staying attuned to fundamental trends rather than short-term market fluctuations can help investors navigate uncertainty effectively.
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--- Written by Gus Farrow
--- Expert: Vincent Deluard, StoneX Director of Global Market Strategy
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