Bank of America’s latest market call is less a typical bearish outlook and more of a structural warning about what will happen if the market stops paying premium multiples, even if earnings continue to grow.
The firm claims that the S&P 500 index remains “statistically overvalued” in 18 of 20 valuation metrics, has hit near all-time highs four times, and that it expects the P/E ratio to be compressed despite forecasting strong earnings growth of 14%.
The setup of strong fundamentals meeting falling multiples creates a textbook risk-off problem for Bitcoin. Bitcoin is increasingly trading as a volatile equity beta, rather than the diversification narrative that dominated the cryptocurrency’s early institutional pitches.
BofA isn’t predicting a collapse in earnings, so mechanics matter.
The company’s year-end S&P 500 price target of 7,100 suggests significant compression driven by five specific pressure points, even if earnings are at the high end of consensus. Deteriorating returns due to falling prices, expanding capital bases due to a surge in IPO supply, increasing asset strength and leverage on corporate balance sheets, and what BofA calls “index risk due to private hiccups.”
Software stands out as the epicenter of the stress, down about 20% since the start of the year, with valuations hitting near decade lows amid concerns about AI, and BofA explicitly warning that the sector is unlikely to recover anytime soon.
For Bitcoin, this is important. This is because the relationship between cryptocurrencies and traditional stocks has fundamentally changed since 2020.
According to CME research, the correlation between Bitcoin and Nasdaq has reached between 0.35 and 0.6 from 2025 to early 2026, with cryptocurrencies consistently amplifying stock price movements on down days.
The diversification theory of “digital gold” has given way to the reality that Bitcoin acts as a liquid beta in a multi-asset portfolio. This is an extension of volatile US tech exposure, which is the first to be sold as risk appetite shrinks.
Integrating period calculations and assets with no cash flows
If the market demands a higher risk premium or if real yields rise, the reprice of long-term assets will fall.
Bitcoin has no revenue stream, no dividends, and no terminal value calculation. But empirically, it behaves like a very period sensitive asset.
This mechanism is implemented by the discount rate. Assets with purely speculative cash flows tend to be hit harder as investors pay less for future growth and compress multiples for stocks with real cash flows.
The evidence is in rising real yields and stock price volatility.
If the March FOMC signals a slowdown in the pace of rate cuts, especially after the February CPI release on March 11th, Bitcoin’s implicit “duration” will be repriced similar to growth stocks.
BlackRock specified that the trajectory of cryptocurrencies in 2026 will be determined “primarily” by liquidity conditions and the pace of interest rate cuts, positioning monetary policy as a primary driver rather than a secondary consideration.
Deleveraging and liquidity issues between assets
On February 5th, a stress test was conducted to determine how quickly cryptocurrencies can deleverage portfolios.
Bitcoin liquidations exceeded $1 billion on the day, coinciding with a decline in tech stocks and deteriorating risk sentiment related to institutional crypto ETF outflows.
This episode was not a unique crypto event, but rather a reflection of Bitcoin’s position in the liquidity hierarchy.
As multi-asset portfolios reduce their total exposure during drawdowns, managers sell liquid and moving items. Bitcoin qualifies on both counts.
IMF research documents the increasing spillover effects and interdependence between cryptocurrencies and traditional financial assets, especially during times of turmoil.
This structural setup means that Bitcoin does not separate during times of stress. The initial risk-off impulse is amplified because they are easier to exit than locked-up private positions or less liquid alternatives.
Reuters highlighted that AI-enabled borrowing increases corporate leverage and puts pressure on coverage ratios, a kind of macro feedback loop that exacerbates the risk-off cascade.
More leverage in the system means more vulnerability, and Bitcoin is at the intersection of maximum liquidity and maximum volatility when those cascades are triggered.
How ETFs work turns sentiment into daily tape signals
The introduction of the Spot Bitcoin ETF has changed how risk-off translates into price action.
What previously appeared as general “sentiment” now manifests mechanically as slow inflows or full redemptions, turning institutional positioning into daily observable signals.
As of early February, CoinShares reported weekly outflows of $1.7 billion, of which Bitcoin alone accounted for $1.32 billion, a sharp reversal that saw year-to-date outflows slip into net negative territory.
The structure of ETFs creates a tight feedback loop. Weakness in stocks can cause outflows, which can weigh on Bitcoin prices and trigger stop losses and forced sales on leveraged positions, which feeds back into further outflows.
This is fundamentally different from the pre-ETF era, when institutional exposure was difficult to track and slow to adjust. Plumbing now exists for stress in the stock market to be transmitted to the crypto market within the same trading session.
Failed rallies are easier to diagnose. If Bitcoin rebounds on lower volume but ETF flows remain negative or neutral, the rally lacks institutional strength.
Multi-day redemption patterns consistent with range-bound or declining prices suggest that bids will not return until equity conditions stabilize or macro catalysts change.
AI Narrative Contagion and Beta Selling Reflexes
BofA’s identification of software as the worst-performing sector in 2026 has significance beyond traditional stock analysis.
Software is down about 20% year-to-date, with valuations at 10-year lows, reflecting growing skepticism about AI’s capital investment returns and the sustainability of the winner-take-all narrative.
If the market changes from “AI changes everything” to “AI capital investment pricing may be wrong,” the instinct is to sell a broad beta rather than carefully distinguishing winners from losers.
Bitcoin is thrown into that beta pile as a bucket, even though it is not directly exposed to AI.
This mechanism is carried out through narrative transmission. In short, when cracks appear in high-growth, high-multiplier sectors, risk managers reduce exposure to what is seen as speculative or momentum-driven.
The report directly linked the decline in software to the weakness in Bitcoin and Ethereum on February 5, noting that the decline in the software index “accelerated the decline” in the cryptocurrency market.
NVIDIA’s financial results announcement on February 25th will serve as an immediate test.
If guidance disappoints or raises questions about the sustainability of capital investment ROI, software vulnerabilities are likely to deepen further, and Bitcoin will face fresh selling pressure as management retreats from what they see as correlated risks.
If Nvidia allays concerns and stabilizes the AI tape, Bitcoin will get a reprieve, but only if flows turn positive and the macro environment cooperates.
3 scenarios, 1 catalyst window
The base case assumes an orderly downgrade, including mixed earnings, acceptable CPI data, and a cautious Fed stance in March.
As valuations are gradually compressed, stock prices remain flat or decline. Bitcoin trades erratically with a downside bias, the rebound fades as ETF flows remain weak, and the correlation with equity risk-on/risk-off remains positive but manageable.
Volatility subsides, liquidations remain subdued, and markets await the next macro catalyst.
Tail risks are concentrated in AI air pockets. Nvidia’s guidance spooks the capex story, accelerates the decline in software follow-through, and spikes stock volatility.
Bitcoin is the most liquid asset available and has a high beta, so it suffers from larger drawdowns than stocks. ETF outflows are accelerating, liquidations are surging, credit spreads are widening, and forced selling is prevailing.
The message is unmistakable: a sharp, correlated movement across risk assets, with cryptocurrencies leading the decline.
The upside scenario requires macro easing. So CPI cools, the Fed signals an early rate cut, and NVIDIA reassures the market about AI fundamentals. Stocks could rebound and Bitcoin could outperform with reflexive risk onflows and improving ETF demand.
Correlation increases as inflows return and volatility decreases. The outcome depends on several conditions. While this is possible, it is not the path of least resistance given our current position.
| scenario | NVDA Results (February 25) | CPI results (March 11) | FOMC Signal (March 17th-18th) | Stock structure (volume + multiple) | BTC Impact (Direction + Volatility) |
|---|---|---|---|---|---|
| Base: Ordered derating | beat/inline. Guidance is stable, but not “explosive” (questions about capex ROI remain) | Inline/slightly cooler. No re-acceleration of inflation | Hold carefully. “Data dependence” strengthened, reduction not imminent | Missed evaluation: Gradual P/E compression, rotation, moderately high volume but included | choppy, downward bias;If risk appetite weakens, the rebound will weaken. medium volume |
| Disadvantages: AI air pocket / risk-off cascade | Guidance is lacking or erratic. There are doubts about the strength of capital investment. Significant reduction in “AI trade” | Hot print/sticky service; extrude cut | Take a more hawkish view. Slow/few cutting paths | Sharp multiple compression + volume spike; “Beta sales” tape, tightening financial situation | violently down, amplified vs. stocks (liquidity beta). ETF outflow amount/volume risk will increase. Highest volume |
| Benefits: Macro relief + AI peace of mind | strong beat. Guidance to de-risk AI demand and capital investment ROI | It’s cooler than expected. Disinflation theory is gaining strength | Dovish hold/signal for a faster cut (or faster pace) | risk on rebound;Volume decreases. Multiples stabilize or are moderately revalued | can outperform Reflexive risk-on + flow improvement. volume decreases However, it is still rising compared to stocks. |
Immediate testing will take place within a few weeks
Nvidia’s financial results will be announced on February 25th. March 11th brings you the February CPI print edition. March 17-18 will be the framework for the next FOMC decision.
These three events will determine whether BofA’s price/earnings compression theory develops quickly or is delayed by better-than-expected data.
With Bitcoin, the stakes are simple. If stocks are repriced from “pricing for perfection” to “reducing the price to pay for risk,” cryptocurrencies will be sold off as liquid beta through deleveraging, tightening liquidity, and ETF structures before serious discussions of decoupling can begin.
BofA maintains its year-end target for the S&P 500 at 7,100, warning that a rapid recovery is unlikely.
If that view proves correct, Bitcoin faces structural headwinds that have little to do with crypto-specific fundamentals and more to do with its status as a volatile equity beta in an environment where markets stop paying premium multiples.
The catalytic window is instantaneous, the transmission channel is well established, and the ETF infrastructure ensures that the feedback loop runs faster than previous cycles.
(Tag translation) Bitcoin
