MW A 'toxic cocktail' threatens stocks. Why the S&P 500 could drop 15%, according to this hedge fund
By Jules Rimmer
The current inflation dynamics and yield trends have generated negative S&P returns in the past
Rising prices inflation in a strong economy has historically led to a negative 15% S&P 500 return, cautions these hedge fund strategists.
Investors are underestimating the inflationary threat to both stock and bond markets, and yields must rise to compensate for that risk, say strategists at hedge fund Zweig-DiMenna.
They looked at the combination of rising consumer prices in tandem with the strong economic outlook currently prevailing and found that, for the last fifty years, this has led to a negative annualized return for the S&P 500 SPX. It's not marginal either; it's minus 15%, Michael Schaus and Matthew Finkelstein told clients in a monthly newsletter published Wednesday.
The strategists at the well-known hedge fund of some forty years' standing with an impressive track record, warned that their proprietary measure of inflation indicators has ticked up to 72, a level only seen in 2022, 2018 and 2012 in the last fifteen years.
Inflation outlook indicatoir > 72 = CPI likely higher
That in itself isn't the problem in itself. Rather their gauge of inflation indicators are edging higher at the same time as rising treasury yields globally, robust economic data and high valuations. This toxic cocktail can, the researchers stress, "result in significant equity downside like we saw in 1973, 2000 and 2022.
The Fed is not hiking yet, but the 2-year U.S. Treasury BX:TMUBMUSD02Y yield hovering around 4.10% (35 basis points above Fed funds) means markets are pricing that in fast, they point out. Fixed-income markets often use the two-year note as a guide for where the Fed funds rate will head.
Schaus and Finkelstein note that their model indicates the April CPI figure at 3.8% will likely rise. That's as markets seem eager to look through the present crisis in the Middle East, and assume that a formal end to hostilities will reduce oil prices and inflation. While acknowledging such an outcome seems "logical," they believe inflation will continue higher irrespective of that development. "There's a strong inverse relationship between inflation and equity valuations."
It's not just stocks in the crosshairs of a correction. Zweig-DiMenna look at 10-year Treasury yields BX:TMUBMUSD10Y at 4.6% and calculate that's about 80 basis points above the last CPI print. Historically, that gap is usually 2%, and by their rationale, 10-year yields should back up another 1.2% to 5.8% "to match the norm." During the 1990s, there were times when this cushion was more like 4%.
10-year yield is low relative to CPI at just 0.8% versus a norm of 2%
-Jules Rimmer
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May 22, 2026 07:29 ET (11:29 GMT)
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