A Bull Market May Be Closer Than It Looks

The U.S. equity market risk-reward profile has improved since the start of the year as stocks have already undergone a significant correction, with over half of the Russell 3000 down 20% from recent highs. While consensus fears center on Middle East conflict and oil prices, current 14% earnings growth and 20% forward growth projections suggest a low probability of a recession, which historically only occurs when oil spikes coincide with decelerating earnings. The primary near-term threat stems from rising bond volatility and a negative correlation between equities and 10-year Treasury yields approaching 4.5%. However, increasing bond market instability may force a dovish Fed pivot, potentially reigniting the bull market. Meanwhile, AI serves as a catalyst for margin expansion and cost efficiency rather than a labor demand shock, and a recent shift toward cyclical sectors suggests the market is already looking past geopolitical concerns.