Equities: Correlated rally faces macro headwinds – BNY

BNY’s Head of Markets Macro Strategy Bob Savage notes that global equities have rebounded to near-record levels on strong Q1 earnings optimism and a ceasefire-driven improvement in risk sentiment. However, he stresses that elevated cross-asset correlations with US Dollar (USD), Oil and bonds, plus shifting expectations toward tighter monetary policy, complicate equity allocation and cloud the risk‑free rate anchor underpinning valuations in the US, Europe and Asia.

Ceasefire bounce meets policy uncertainty

"Q1 earnings started with a bang, with estimates for S&P 500 improving and whispers of 19% earnings, 16% margins in the U.S. Global equity markets are back to near-record levels, recovering most war-related losses. The surge in equity flows this week reflected both stronger earnings and hopes that the U.S.-Iran ceasefire would lead to a peace deal."

"The shift from missiles to words lifted risk-taking across asset classes, but the correlation of equities to USD, oil and bonds remains high, which is atypical during earnings season. The lack of divergence in risk-taking across assets makes equity allocation during earnings more complex."

"The EU’s fiscal costs are estimated at 0.6% of GDP; Asia’s are estimated at 1–2% of GDP. Bond markets have not fully priced in the cost of new fiscal spending or the inflationary effects of the supply shock. However, these factors have shifted monetary policy expectations from easing to tightening."

"Among developed market central banks, only the Fed is still seen as likely to ease, with markets pricing just a 40% chance of one cut by year end. Together, these factors cloud the risk-free rate anchor that underpins equity valuations."

"The rally in equity holdings at the start of 2026 was most extreme in EM shares, and the 15% drawdown from peak holdings still leaves emerging markets vulnerable to further reallocation, if inflation and policy issues block earnings growth – particularly in Asia."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)