Stocks vs. Bonds: What The S&P 500/TLT Ratio Is Signaling Now

The current market environment reflects deep uncertainty about the direction of U.S. economic policy. Since the November election, investors have been grappling with a core ambiguity: will the new administration focus on deficit reduction and inflation control to stabilize the long end of the yield curve — or continue to rely on expansionary fiscal measures to sustain growth and support equities?

This policy indecision is playing out in real time through the S&P 500 vs. TLT ratio — a proxy for equity optimism relative to long-duration bond sentiment. Stocks appear to be the clear winner for now, but the uncertainty is far from over.

Post-Election Animal Spirits

From election day through early February, risk assets surged. Equities rallied as markets priced in a pro-growth, pro-inflation policy mix: tax cuts, infrastructure spending, and deregulation.

That optimism drove bond yields sharply higher. The S&P 500 gained in relation to TLT, as expectations for economic growth and inflation soared. It was during this period that the bond vigilantes returned. Bond investors, wary of unchecked fiscal expansion, began demanding higher yields on long-dated Treasuries. Some were calling for — and actively pricing in — 10-year yields above 5% — warning of a potential "Liz Truss moment" for the United States.

10-Year Yield As The New North Star

In February, the tone began to shift. The administration appeared increasingly focused on managing optics around the 10-year yield. Social media narratives pivoted away from stock performance and toward long-end Treasury rates and government spending efficiency. 

Treasury Secretary Scott Bessent openly prioritized stabilizing the 10-year yield. He seemed comfortable with a slowdown in growth and even a market correction — if it meant restoring fiscal credibility. Notably, he described tariffs as a tool for deficit reduction by generating additional revenue.

This narrative shift culminated in the "Liberation Day" correction. Equities sold off sharply, driving a temporary flight to quality in Treasuries. Markets had moved from a pro-growth framework to one dominated by concerns over rising rates, tighter financial conditions, and a more restrictive fiscal stance.

A Policy U-Turn

Despite this, the bond market's triumph was short-lived. Shortly after "Liberation Day," markets began pricing in a recession — ironically, a scenario that is also negative for bonds. Recessions typically bring deficit expansions, which are problematic for long-term sovereign debt. With a deficit already near 7% of GDP in non-recessionary conditions, the risk of unsustainable debt dynamics loomed large.

Momentum shifted again. The administration postponed planned tariffs and soon unveiled the "Big, Beautiful Bill" — widely interpreted as a pivot back toward pro-growth policy. Equities rallied, and the S&P 500/TLT ratio climbed higher once more. But this rebound in equity sentiment came at a cost: renewed concern about the long-term sustainability of U.S. fiscal policy and its impact on long-end yields.

No Room for Error

To keep the long end of the curve under control, the administration faces a perilously narrow policy corridor. In our view, the best possible outcome is a mild economic slowdown or shallow recession — enough to cool inflation expectations without triggering another surge in deficit spending.

That scenario could prompt a correction in the S&P 500, driven by stagnant or negative EPS growth. If investors react negatively to the slowdown in earnings, a correction is likely. However, if markets look through the temporary dip in EPS — viewing it as a short-term issue that will improve in the following year — then a correction may not occur. On the other hand, overheating the economy could prove far worse. If policymakers lose control of the long end of the Treasury curve, the cost of capital could rise sharply, placing serious pressure on equity valuations.

The current uncertainty is likely to persist. Investors would do well to track the S&P/TLT ratio closely. When the ratio climbs, it's likely a signal to reduce equity exposure and shift toward bonds. When the ratio falls, it may be a good time to add to equities, as they may be poised for recovery. Either way, this ratio offers a real-time lens on the underlying tension shaping markets in 2025.