In the ancient spectacle of the bullfight (or corrida de toros), the Matador must understand the bull's nature, anticipate its movements, and recognize the precise moment when its confidence becomes its vulnerability. The corrida is carefully planned and executed, layered into a series of phases that must each be completed skillfully before the killing blow (the estocada).
The Matador must remain calm, knowing that behind the frenzy is the inevitable exhaustion. And the moment that exhaustion appears, perhaps even before it is known to the bull (who has been in a frenzied attack for hours), the death blow is delivered.
In markets, like bullfights, the ferocity continues until it absolutely can no longer. If there is a singular task that every bull market in history has accomplished with ruthless efficiency, it is the silencing of contrarian voices by the end of its run. Those with the audacity to have warned of risks before the point of absolute exhaustion end up derided and ignored.
This effect persists well after prices have begun to crack, and when combined with the lessons of recent successful bouts of dip buying, create the “complacency” phase of perhaps one of the most acknowledged and ignored charts in markets.
While the length of this piece is…manifesto-y, it’s a necessary exercise in examining the market holistically. That’s because I am more convinced than ever that we have entered the complacency phase of the cycle.
While recent events have taken some of the air out of the most egregiously crowded trades in the market, we have so much further to go. Exceedingly few are truly positioned for the bear market and the bulls haven’t given up without a fight. Investors are frozen, even as they realize that things are, in fact, getting worse.
However, there are still a few that see this for what it is. One of those is my friend and legendary strategist Marko Kolanovic, unique among Wall Street’s outspoken voices for not capitulating on his conviction that the market has climbed to unsustainable heights and is complacent, if not ignorant, to the significant downside risk.
In many ways, he is truly one of the Last Bears Standing. He’s been kind enough to author the foreword to Matador: The Bull Killer Foreword
By: Marko Kolanovic
When my friends at The Last Bear Standing asked me to write my thoughts about markets, I agreed. I have been intensely thinking about recent market developments and the enormous levels of uncertainty across the world—perhaps last seen during the 2008 Global Financial Crisis (GFC) and the 2020 pandemic.
Let me start by saying that global macro and geopolitical developments are so profound and complex that one should assess developments day by day and remain flexible to adjust their outlook based on new developments.
Before formulating a view, one needs to first understand where we are currently in the historical context and, more importantly, how markets arrived at their present state. I will start with the 2020 COVID crisis—a great recession that never materialized due to a massive wave of fiscal and monetary easing across the world. As such, the 2020 recession never performed its role of purging unviable businesses and market excesses, and hence it never set the stage for healthy and sustainable growth. If anything, we saw the emergence of inherently worthless assets and shaky businesses with sky-high valuations. Economies grew increasingly dependent on government projects and handouts. It should not be surprising that the combination of COVID disruptions and these monetary and fiscal excesses resulted in inflation not seen since the 1970s.
When the Federal Reserve (being late) began hiking rates in 2022, air came out of broad markets and various speculative assets. Inflation breakevens dropped quickly by early 2023, but the Fed continued hiking to 5.5%. The yield curve inverted—a historical signal of recession. I did not believe that markets would thrive in 2024 with these high rates, even though recessions typically start with a significant lag (1–2 years after yield curve inversion). However, in 2024, everybody forgot about the inversion, rising defaults and recession risks, and it became extremely rare and unpopular to have a cautious market view. Despite near-unanimous optimism, low-end consumers still faced pressure from high credit card and other debts, small businesses struggled with financing costs, and real estate markets remained paralyzed. These concerns were set aside as the economy thrived on promises of AI, the stock market’s wealth effect, record government spending, and interest rate cuts that began just before key elections (here).
Markets ended 2024 with P/E multiple near the highest level since the dot-com bubble burst, with narrow leadership—concentration levels not seen in over 50 years. However, there were many signs that a major rebalancing in markets is about to happen which I discussed here, and here.
It didn’t take very long for a correction to begin. The bubble in momentum stocks (both large and small) started unraveling in January 2025 (here). If a stock has a multiple of ~400, a 40% drop should not surprise anyone (here). What followed, however, was far more devastating for markets and the real economy: the start of an unwinnable trade war between the U.S. and much of the world (here, here). Students of markets should recall the first trade war in 2018—not only President Trump’s tactics and response functions, and his relationship with Chairman Powell (here), but also take into account the differences between his first and second presidential terms. I warned that markets would experience a larger drawdown, with the so-called put option strike lower than most anticipated (here, here). Since the trade war began, damage has grown daily, and most economists now estimate a ~50% or higher probability of an imminent recession. In early April 2025, markets crashed, and the VIX reached levels seen during the Global Financial Crisis (GFC) and COVID-19 pandemic.
The probability of a recession is indeed very high, and we may already be in one. Notably, the yield curve inversion that started in 2022 typically indicates a recession when the curve finally un-inverts. Well, three years after the first rate hikes, we saw that signal in 2025. Declining asset prices (both stocks and bonds) have eroded the wealth effect, negatively impacting economic activity. The new administration intends to cut, rather than increase, spending. Low-end consumers continue to struggle, and with the prospect of layoffs, their situation is likely to worsen. The trade war is expected to slow the global economy, and the Fed is not yet signaling relief just yet (here). In addition there is a risk of inflated private assets and crypto.
Where does this leave us after the recent bounce and partial market retracement? The S&P 500’s forward multiple is 20x, and earnings are not properly reflecting recession risks. With a multiple of 20x, how much upside remains? In many recent crises—such as the 2002 double bottom, the 2011 European debt crisis, the 2015 emerging markets crisis, the 2018 trade war, and the 2022 rate hikes—the S&P 500’s multiple dropped to ~15, suggesting a ~20% decline from current levels. I have not yet heard a compelling argument why the multiple would not fall to ~15x and remain there for more than a few days during this crisis. Even assuming a quick earnings recovery to $300, a multiple of ~15x would place the S&P 500 below 5,000. Worse scenarios are plausible: if earnings decline (as in a recession) and the multiple drops to ~15x, the S&P 500 could fall to the high 3,000s or low 4,000s. Even more severe outcomes, though less likely, are also possible—during the GFC, earnings plummeted, and the multiple fell to ~12, and stayed there for a few years.
Downside risk for markets remains substantial, with limited upside after the recent rally. Current prices assume an optimistic resolution to the significant economic, political, and geopolitical challenges the world faces. Trade with caution and evaluate new developments as they arise. Marko Kolanovic, PhD @markoinny
Traje de Luces: The Setup
There is a moment when the writing is on the wall for anyone that cares to look, but few do. I would describe this well-established dynamic, but there is no way I’d do it better than Colm O’Shea in his Hedge Fund Market Wizards interview:
Anyone that has been paying close enough attention can see the echoes of the last market top and reversal. Today, we face some similar concerns to the ones that unwound the 2021 peak – a compression in multiples from an overheated equity market, cost and inflationary pressures, and trade concerns.
But in 2022, the US economy was still in a strong state of rebound with a massive labor shortage and rapid jobs growth. Inflation was largely driven by excessive demand and the negative drag of monetary policy was balanced by a growing fiscal impulse.
Today, economic growth is slowing after reaching unsustainable levels. Trade is coming to a halt and fiscal outlays are being slashed. The easy narrative of inflation reversion and Fed panic has given way to a multitude of threats. The days for this bull market — built on unsustainable capital allocation, misplaced trust in institutions, and a speculative fervor — are over.
Here is the opinion of this Bear. The market’s current decline is not a correction, a bump in the road, or a dip to be bought.
We have entered a protracted bear market that will result in sub-par equity returns from current levels. If investors push this bear market rally higher, I will be happily selling to them the whole way. This unwind has been in the making for nearly four years, and now it is time for the conclusion..
