Viewpoint: Markets — moving in lockstep

Markets — moving in lockstep

At the time of writing (March 27, 2026), the S&P 500 Index¹ is down 8% from the all-time high established on January 27 and sitting at its lowest level since last summer, a less-than-ideal outcome for investors but still below the “correction” threshold of 10%.

At the same time, analyst earnings revisions in the U.S. are continuing to trend higher and consensus forecasts for earnings per share over the coming 12 months have increased by roughly 4% so far through March — the net result is that the forward price-to-earnings ratio for the S&P 500 has compressed to 19.2x from 21.3x at the end of February, bringing it back within one standard deviation of its four decade average.

S&P 500 forward price-to-earnings ratio
(ratio)

Shaded regions represent periods of U.S. recession; dashed line is historical average, solid black lines represent +/-1 standard deviation from that average; source: Guardian Capital LP, based on data from Bloomberg to March 27, 2026

This valuation adjustment from extremes mirrors the shift in investor sentiment over the past month — the Investors Intelligence advisor survey has seen the share of “bullish” respondents plunge while the “bear” camp has edged higher, resulting in the differential between the two narrowing from a recent peak of +47.1 percentage points in February to just +14.3ppt in the latest reading, which marks the lowest since last June (and is actually now below the long-term average of +19ppt).

Investors Intelligence (II) Bull-Bear differential
(“bullish” survey respondents less “bearish”; percentage points)

Source: Guardian Capital LP, based on data from II², the WSJ, and Ned Davis Research to March 24, 2026

Interestingly (to me at least!), this softening in equity markets against the developments in the Middle East has been effectively matched by a softening in bond markets that are supposed to serve as a ballast in multi-asset portfolios in times of market turmoil, as the concerns about the inflationary impulse of the oil price shock has driven a shift in the expected policy rate path and push yields higher.

For example, scaling equity valuations to prevailing government bond yields (the so-called Fed Model) shows that there has been only negligible change in the relative valuation — typically, bonds get bid up in a flight to safety amid equity sell-offs and bonds gain a relative premium (reduce relative discount), but, over the past month, it has actually been the case where the balance has marginally moved in favour of equities.

Fed’s equity valuation model*
(percent)

*S&P 500 composite price index divided by S&P 500 fair-value defined as S&P 500 12-month forward consensus earnings per share divided by Bloomberg U.S. Treasury bond index yield; shaded regions represent periods of U.S. recession; source: Guardian Capital LP, based on data from Bloomberg to March 27, 2026

What does this suggest? Some froth and investor exuberance have been cleared from equity markets, but so far, it appears that the valuation adjustment has just been a function of the rise in rates — the increase in bond yields has so far been in lockstep with the equity multiple compression.

On the negative side, should the situation in the Middle East persist and/or escalate and dampen the broader economic outlook, assuming a constant valuation multiple, it would suggest added declines in markets that, so far, may not be fully appreciating these downside risks to earnings growth (likely due to hopes for a near-term resolution). Alternatively, should inflation expectations move higher in response to concerns of a prolonged or larger oil price shock and drive a further shift in the expected path for policy rates, that could lead to a further multiple compression that continues to maintain relative valuations, all else being the same.

On the positive side, however, should rates move lower as markets reassess the outlook for policy rates, that could serve as a support for equities even amid ongoing uncertainty. Further, should some kind of sustained resolution to the war be reached in short order, such that there is ultimately minimal impact on growth and inflation, improvements in investor sentiment and scope for even modest multiple expansion could clearly be a boon for investors.

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David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.

¹ The S&P 500 is an index of 500 stocks designed to reflect the risk/return characteristics of the large-cap US equity universe.
² Investors Intelligence, Advisors’ Sentiment Report, as at March 25, 2026

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Published: March 27, 2026