The Bear Case for Stocks Is a Sales Pitch in Your Inbox

When a bank says stocks are priced for a lost decade, that research ends up in deal decks. Stocks being a sell doesn't make alternatives a buy.

Bank of America sent a note to clients this week with an ugly number in it. The bank compares the S&P 500's price to its average earnings over the past several years — averaging smooths out the unusually good and bad years. That ratio now sits at 32, and starting from a price that high, history says the index returns about negative 3% a year for the next decade. Not a crash call. Something quieter and worse: ten years of no gains while inflation eats away at the money the whole time.

And this isn't some fringe indicator. The bank says this measure has explained around 80% of the market's ten-year returns historically. Of the ten valuation gauges it tracks, seven now point to negative returns by 2036. The average implied return across all ten: -1.4% a year. Their suggested move is rotating into the equal-weighted version of the index, which is cheaper and implies modestly positive returns.

I take this seriously. It's the institutional version of something I keep writing about: gauges like this measure, they don't predict timing. A reading of 32 can't tell you when stocks fall, or whether they fall at all this year or next. It tells you one thing — that people who bought at prices this high have historically earned poor returns over the following decade — and it warns you that staying disciplined is about to feel expensive. Even the bank softened its own warning, adding that the projections might be too harsh on today's market. Sit with that for a second: they built the gauge, the gauge says a lost decade, and they still couldn't resist adding "but maybe not this time." When even the people holding the instrument apologize for the reading, that's what discipline getting expensive looks like.

But the note skips the question that matters most for LPs: when money believes this forecast, where does it go?

It goes to your inbox

Think about what happens next. A decade of nothing from stocks sends money hunting for returns somewhere else, and "somewhere else" is alternatives — real estate, private credit, energy, funds. Sponsors raise more, faster. And when the checks show up no matter what, careful underwriting is the first thing to go, because it can.

Which means this research note, or one like it, is going to show up inside deal decks. It may already be in yours. The slide is standard by now: public markets priced for negative returns, sophisticated capital rotating into alternatives, a chart of projected stock returns pointing down. The bear case for stocks is the best marketing a mediocre deal ever gets — because it lets the sponsor off the hook of arguing the deal is good. The deck only has to argue that stocks are worse. And compared to negative 3% a year, almost anything sounds brilliant.

That's the trap: stocks being a sell doesn't make alternatives a buy. Every investment has to stand on its own fundamentals — and a rotation pitch is built to keep you from checking them.

The same math applies to the deal

Here's what the rotation pitch quietly assumes: that valuation math applies to stocks but not to the thing you're rotating into. It applies to both. The entire reason the bank expects a bad decade is that the price being paid today for a dollar of earnings is historically high — and the price you start at decides the return you end up with. That rule doesn't care whether the asset has a ticker. The same wave of money leaving expensive stocks bids up private assets on its way in, pushing their future returns down the same way, at the same time, for the same reason.

The difference is that nobody publishes the number. There's no normalized P/E for a syndication, no client note, no ten-gauge dashboard. Money leaving stocks at 32 times earnings and buying a building at a 4% yield on its actual income hasn't escaped expensive assets. It changed costumes.

So run the bank's exercise on the deal — not because anyone hands it to you there, but because the check makes sense everywhere: the price you start at decides the return you end up with. The private-market version fits on a napkin: what am I paying against the income the asset produces right now — the purchase price against real, in-place net income, not the projected version. Then ask the same question the bank asked: what does this starting price say about the next ten years?

And watch what happens when you ask. If the honest answer embarrasses the deck, the deck will steer you to a different number — the stabilized yield, the pro forma income, the year-three figure after the business plan works. That's the tell. It's the same move as pricing the S&P 500 on the earnings everyone hopes it makes in 2029. When a deal only looks reasonable priced on future income, the current price is your answer — and it's saying the same thing the bank's gauge is saying about stocks.

There's a second comparison that belongs next to it. Every deck arrives with projections — rent growth, exit price, the return you'll supposedly earn. Compare them to what this same type of deal, in the same geography and the same niche, has actually delivered over time. Not to the sponsor's own highlight reel — to the historic averages for the category. If a deck projects rent growth at twice the long-run number for that market, that isn't a forecast. It's a sales number. And if you never make that comparison, you haven't underwritten anything. You've taken a marketing pitch at face value.

Even the bear case ends in a ticker

One more thing about the note. Bank of America looked at its dashboard, concluded stocks are priced for a lost decade — and the actionable output was still a product: rotate into the equal-weight index, conveniently available as an ETF. I'm not picking on the bank; the equal-weight idea makes sense on its own terms. I'm pointing at the reflex. In this industry, every diagnosis ends in a purchase. The research says winter is coming; the conclusion is here's what to buy.

Your inbox runs on the same reflex. The diagnosis is stocks; the purchase is the deal. Once you notice it, you see it everywhere — and you start asking the one question the pitch is built to skip: not "is the old thing bad," but "is the new thing cheap."

Which is why I built that projections-versus-history comparison into DiligenceBrief, the tool I run my own deal flow through — I wanted it to happen on every deal, every time, including the exciting ones, which is exactly when I trust myself least. And yes, I notice what I just did: I've spent this piece saying every diagnosis ends in a purchase, and here I am mentioning my own tool. So let me be straight about it. The check is the point, not the product. Run it on a napkin, run it in a spreadsheet, run it through what I built — the only version that doesn't work is the one that doesn't run.

So here's what I do with a note like this one. I take the warning seriously for what it is — a reading on public stock prices, from a well-built gauge. I don't accept the comparison, because a bad decade for stocks doesn't make any specific deal in my inbox good. And I price the deal the way the bank priced the index: today's price against today's income, and let that number — not the rotation story — tell me what the next decade probably holds.

This is one of many checks I run on every deal I consider — not the whole diligence process. It isn't investment advice, and nothing here is a recommendation to buy or sell anything. Do your own homework — that's kind of the whole point.

Tim is an LP in real estate and alternative credit and builds DiligenceBrief, a due diligence tool for LPs.