Bank of America’s latest market call reads less like a typical bear forecast and more like a structural warning about what happens when markets stop paying premium multiples, even if profits keep growing.
The firm argues that the S&P 500 remains “statistically expensive” on 18 of 20 valuation metrics, with four near-record highs, and expects P/E compression despite forecasting robust 14% earnings growth.
That setup of strong fundamentals meeting falling multiples creates a textbook risk-off problem for Bitcoin, which has increasingly traded as a high-volatility equity beta rather than the diversifier narrative that dominated crypto’s early institutional pitch.
The mechanics matter because BofA isn’t predicting an earnings collapse.
The firm’s year-end S&P 500 target of 7,100 implies significant multiple compression even with profits on the high end of consensus, driven by five specific pressure points: earnings downgrades following price drops, a surge in IPO supply expanding the equity base, rising asset intensity and leverage in corporate balance sheets, and what BofA calls “index risk from private hiccups.”
Software stands out as the stress epicenter, down roughly 20% year-to-date, with valuations near decade lows amid AI concerns, a sector BofA explicitly flags as unlikely to snap back quickly.
For Bitcoin, that matters because crypto’s relationship with traditional equities has fundamentally shifted since 2020.
CME research documents correlations between Bitcoin and the Nasdaq reaching 0.35 to 0.6 during 2025 and early 2026, with crypto consistently amplifying equity moves on down days.
The “digital gold” diversification thesis has given way to a reality where Bitcoin functions as liquid beta in multi-asset portfolios, a high-volatility extension of US tech exposure that gets sold first when risk appetite contracts.
Bitcoin’s 20-day rolling correlation with major equity indices shows near-zero correlation with the S&P 500 and Nasdaq as of late October 2025, while maintaining strong positive correlation above 0.90 with Ethereum, XRP, and Solana.Duration math meets cashflow-free assets
When markets demand higher risk premiums or real yields rise, long-duration assets reprice lower.
Bitcoin has no earnings stream, no dividends, and no terminal value calculation. Yet, it behaves empirically like an asset with extreme duration sensitivity.
The mechanism runs through discount rates: if equities with actual cash flows see multiples compress because investors pay less for future growth, an asset with purely speculative cash flows tends to get hit harder.
The tell will show up in real yields and equity volatility rising together.
If the March FOMC signals a slower pace of rate cuts, particularly after the February CPI print on Mar. 11, Bitcoin’s implied “duration” gets repriced alongside growth stocks.
BlackRock explicitly framed 2026’s crypto trajectory as being driven “in large part” by liquidity conditions and the pace of cuts, positioning monetary policy as a first-order driver rather than a secondary consideration.
Cross-asset deleveraging and the liquidity problem
Feb. 5 delivered a stress test of how quickly crypto can get caught in broader portfolio deleveraging.
Bitcoin liquidations exceeded $1 billion that day, coinciding with a tech selloff and deteriorating risk sentiment linked to institutional crypto ETF outflows.
The episode wasn’t an idiosyncratic crypto event, it was a reflection of Bitcoin’s position in the liquidity hierarchy.
When multi-asset portfolios reduce gross exposure during drawdowns, managers sell what’s liquid and what moves. Bitcoin qualifies on both counts.
IMF research has documented increasing spillovers and interdependence between crypto and traditional financial assets, particularly during turbulence.
The structural setup means Bitcoin doesn’t decouple during stress. It amplifies the initial risk-off impulse because it’s easier to exit than locked-up private positions or illiquid alternatives.
Reuters highlighted AI-driven borrowing sprees lifting corporate leverage and pressuring coverage ratios, exactly the kind of macro feedback loop that worsens risk-off cascades.
More leverage in the system means more fragility, and Bitcoin sits at the intersection of maximum liquidity and maximum volatility when those cascades trigger.
ETF mechanics turn sentiment into daily tape signals
The introduction of spot Bitcoin ETFs changed how risk-off translates into price action.
What used to show up as generalized “sentiment” now appears mechanically as slower inflows or outright redemptions, turning institutional positioning into a daily observable signal.
CoinShares reported $1.7 billion in weekly outflows as of early February, with Bitcoin alone accounting for $1.32 billion, a sharp reversal that flipped year-to-date flows into net negative territory.
The ETF structure creates a tight feedback loop: equity weakness triggers outflows, which pressure Bitcoin prices, which can trigger stop-losses and forced selling in leveraged positions, which in turn feed back into more outflows.
That’s fundamentally different from the pre-ETF era, when institutional exposure was harder to track and slower to adjust. Now the plumbing exists for equity-market stress to be transmitted to crypto markets within the same trading session.
Failed rallies become easier to diagnose. If Bitcoin bounces on lighter volume but ETF flows remain negative or neutral, the rally lacks institutional conviction.
Multi-day redemption patterns coinciding with range-bound or declining prices suggest the bid won’t return until either equity conditions stabilize or macro catalysts shift.
AI narrative contagion and the beta-selling reflex
BofA’s specific call-out of software as 2026’s worst-performing sector carries weight beyond traditional equity analysis.
Software’s roughly 20% year-to-date decline, with valuations at decade lows, reflects growing skepticism about AI capex returns and the sustainability of winner-takes-all narratives.
If the market shifts from “AI transforms everything” to “AI capex may be mispriced,” the instinct isn’t to carefully separate winners from losers, but to sell broad beta exposures.
Bitcoin gets bucketed into that beta pile despite having no direct AI exposure.
The mechanism runs through narrative contagion: when high-growth, high-multiple sectors crack, risk managers reduce exposure to anything perceived as speculative or momentum-driven.
Reports tied the software selloff directly to Bitcoin and Ethereum weakness on Feb. 5, noting the software index decline “accelerated the slide” in crypto markets.
Nvidia’s earnings call on Feb. 25 functions as the immediate test.
If guidance disappoints or raises questions about capex ROI sustainability, the software weakness is likely to deepen, and Bitcoin faces renewed selling pressure as managers exit what they perceive as correlated risk.
If Nvidia calms concerns and stabilizes the AI tape, Bitcoin gets a reprieve, but only if flows turn positive and macro conditions cooperate.
Three scenarios, one catalyst window
The base case assumes orderly de-rating: mixed earnings, acceptable CPI data, and a cautious Fed in March.
Equities grind sideways or lower as valuations compress gradually. Bitcoin trades choppy with a downside bias, rallies fade when ETF flows stay weak, and correlation with equity risk-on/risk-off remains positive but manageable.
Volatility compresses, liquidations stay contained, and the market waits for the next macro catalyst.
The tail risk centers on an AI air pocket: Nvidia’s guidance spooks the capex narrative, software follow-through accelerates lower, and equity volatility spikes.
Bitcoin suffers a drawdown larger than that of equities because it’s the most liquid, high-beta asset available. ETF outflows accelerate, liquidations surge, credit spreads widen, and forced selling dominates.
The tell would be unmistakable: sharp, correlated moves across risk assets with crypto leading the decline.
The upside scenario requires macro relief: CPI cools, the Fed signals cuts sooner, and Nvidia reassures markets on AI fundamentals. Equities bounce, and Bitcoin can outperform on reflexive risk-on flows plus improving ETF demand.
Correlations rise as inflows return and volatility falls. That outcome depends on multiple conditions aligning, which is possible, but not the path of least resistance, given the current positioning.
| Scenario | NVDA outcome (Feb 25) | CPI outcome (Mar 11) | FOMC signal (Mar 17–18) | Equity regime (vol + multiples) | BTC impact (direction + volatility) |
|---|---|---|---|---|---|
| Base: Orderly de-rating | Beats/inline; guidance steady, but not “blowout” (capex ROI questions linger) | In-line / slightly cooler; no inflation re-acceleration | Cautious hold; reinforces “data-dependent,” cuts not imminent | Valuation leak: gradual P/E compression, rotation, moderately higher vol but contained | Choppy, downside bias; rallies fade on weak risk appetite; vol moderate |
| Downside: AI air-pocket / risk-off cascade | Miss or shaky guidance; capex intensity questioned; “AI trade” de-rates hard | Hot print / sticky services; pushes out cuts | More hawkish hold; slower/less cutting path | Sharp multiple compression + vol spike; “sell beta” tape, tightening financial conditions | Down hard, amplified vs equities (liquid beta); ETF outflows/liq. risk increases; vol high |
| Upside: Macro relief + AI reassurance | Strong beat; guidance de-risks AI demand + capex ROI | Cooler-than-expected; disinflation narrative strengthens | Dovish hold / signals earlier cuts (or faster pace) | Risk-on rebound; vol falls; multiples stabilize or re-rate modestly | Up, can outperform on reflexive risk-on + improving flows; vol falls but remains elevated vs equities |
The immediate test arrives within weeks
Feb. 25 brings Nvidia’s earnings call. Mar. 11 delivers the February CPI print. March 17-18 frames the next FOMC decision.
Those three events determine whether BofA’s P/E compression thesis plays out quickly or gets delayed by better-than-feared data.
For Bitcoin, the stakes are straightforward: if equities reprice from “priced for perfection” to “pay less for risk,” crypto gets sold as liquid beta through deleveraging, tighter liquidity, and ETF mechanics before any serious decoupling debate begins.
BofA maintains its 7,100 year-end S&P 500 target and warns a quick rebound looks unlikely.
If that view proves accurate, Bitcoin faces a structural headwind that has little to do with crypto-specific fundamentals and everything to do with its position as a high-volatility equity beta in an environment where markets stop paying premium multiples.
The catalyst window is immediate, the transmission channels are well established, and the ETF infrastructure ensures feedback loops run faster than in previous cycles.
Source: https://cryptoslate.com/bitcoin-bulls-could-walk-into-a-1-billion-liquidation-trap-as-bank-of-america-warns-multiples-are-about-to-compress/
