Initial signals of a global market correction endpoint have emerged but are not yet fully in place: the two conditions of oversold assets bottoming out and overbought assets being sold off have been met, but oil prices and the US dollar have not reversed, and the S&P 500 has not been fully cleared. The baseline scenario for the 2020s leans towards inflationary prosperity rather than 1970s-style stagflation, with the key variables being the situation in Iran and the direction of oil prices. NVIDIA's withdrawal of a trillion-dollar AI investment may indicate a slowdown in AI capital expenditure growth.
The global market is currently undergoing an adjustment triggered by external shocks, with investors facing two core questions: when will this round of correction bottom out, and is the current macro environment replicating the stagflation nightmare of the 1970s?
On March 7, Bank of America Merrill Lynch's latest weekly report, 'Flow Show,' offered a relatively optimistic but conditional assessment: signs indicating the endpoint of the correction are emerging, but they are not yet fully in place; the 2020s are more likely to head toward inflationary prosperity rather than a stagflation-induced collapse—provided geopolitical tensions do not escalate further.
According to analysis by Michael Hartnett's team at Bank of America Merrill Lynch, this round of correction was jointly triggered by external shocks and excessive optimism. The market has already shown signs of some 'oversold' assets bottoming out, but oil prices and the US dollar have yet to signal a full reversal, and the S&P 500 index has not undergone sufficient price clearing (such as falling below 6600 points).
Meanwhile, Bank of America Merrill Lynch’s Bull & Bear Indicator remains elevated at 9.2 within an extremely bullish range, indicating that market sentiment has yet to truly cool, thereby limiting the scope for a rebound.
A piece of news from NVIDIA also caused a stir in the market: NVIDIA stated that its previously announced $100 billion investment in OpenAI was 'not part of the plan,' and the $30 billion financing arrangement may already be the upper limit. This statement is seen as a potential signal of deceleration in the exponential growth of AI capital expenditure, with non-negligible impacts on tech bonds and the software sector.
When will the correction end? Four conditions need to be met, and two have been fulfilled so far.
Bank of America Merrill Lynch believes that market corrections triggered by external shocks amid excessively optimistic sentiment typically require four conditions to be met before they can be declared over:
First, 'oversold' assets must bottom out (software, MAGS, private credit, bank loans, Bitcoin);
Second, 'overbought' assets must complete liquidation (gold, semiconductors, metals, emerging markets, Europe, bank stocks);
Third, 'safe-haven assets' must lose buying support (oil prices and the US dollar);
Fourth, genuine price clearance has emerged.
Currently, the first two conditions have begun to appear. Capital flow data corroborates this assessment: this week, gold witnessed its largest weekly outflow (USD 1.8 billion) since October 2025, while the energy sector recorded its largest-ever weekly inflow (USD 7 billion), as investors are "chasing" previously oversubscribed sectors. However, oil prices and the US dollar have yet to show significant declines, and the S&P 500 has not undergone substantial price consolidation.
Merrill Lynch explicitly pointed out that before the direction of the US dollar becomes clear, it is premature to expect a significant rebound. The US Dollar Index serves as the best barometer for global liquidity—should the dollar decisively break above 100, it would indicate a deepening of the "peak liquidity" theme, further compressing expectations for interest rate cuts in 2026 (the market probability of a Federal Reserve interest rate cut on June 17 has dropped from 100% on January 1 to 37%), and could trigger yield curve flattening alongside inflationary oil price shocks.
In terms of capital flows, US equities experienced their largest weekly outflow in six weeks (USD 13.9 billion), while Japanese stocks recorded their largest weekly inflow since October 2025 (USD 4.2 billion). South Korean equities exhibited extreme volatility, with a record single-day inflow of USD 6.1 billion on March 2, followed by a record single-day outflow of USD 4.7 billion on March 4.
Will the 2020s replay the stagflation script of the 1970s?
This is one of the most contentious macro narratives in the current market. Merrill Lynch’s position is that the 1970s represent the closest historical reference point for the 2020s, but the two periods are not entirely equivalent. In the baseline scenario, the 2020s are more likely to trend toward inflationary prosperity rather than a stagflationary collapse.
The logic supporting inflationary prosperity is clear: political populism (non-establishment party votes in UK elections surged from 27% in 2024 to 69% in 2026), tariff and immigration policies reversing globalization, excessive fiscal expansion, accommodative Fed policies, and asset and wealth inflation driven by the "too-big-to-fail" nature of the stock market.
These factors collectively generate inflationary pressure, but government intervention will suppress rising bond yields, ultimately manifesting as a weaker dollar rather than a sharp increase in long-term interest rates. Under this scenario, commodities, tangible assets, international equities, and small-cap stocks are the primary beneficiaries.
Nevertheless, the history of the 1970s remains a cautionary tale. Merrill Lynch has comprehensively reviewed the full trajectory of that era:
From 1970 to 1972, the Nixon administration engineered a boom through aggressive fiscal and monetary easing, driving the stock market up by over 60%.
From 1973 to 1974, runaway inflation coupled with the oil shock caused the stock market to plummet by 45%;
From 1975 to 1976, after the first wave of inflation receded, assets rebounded, with small-cap and value stocks replacing the "Nifty Fifty" as the new leaders;
From 1977 to 1980, the Iranian Revolution triggered a second wave of inflation, causing the stock market to fall again by 26%, until the Volcker Shock finally brought it to an end.
Applying this to the current situation, Bank of America Merrill Lynch believes that the key variable lies in the situation in Iran. If the conflict is short-lived, with oil prices remaining below $90 per barrel, the narrative of inflationary boom holds, and commodities, emerging markets, and small-cap stocks will benefit as the bear market in the US dollar resumes; if the conflict extends (blockade of the Strait of Hormuz, Iran attacks regional oil infrastructure), and oil prices rise above $100 to $120 per barrel, asset allocation will tilt towards oil, the US dollar, US technology, and global defense, while Japan, South Korea, Europe, and other energy-import-dependent markets will face the heaviest pressure.
Looking at the "puzzle" of asset performance in the 1970s, gold and commodities ranked among the top returns almost every year throughout the stagflation cycle, while equities and bonds showed mixed performances. This historical pattern has already begun to reflect in today’s markets—since the start of 2026, oil prices have surged by 30%, gold has risen by 18.3%, commodities overall have increased by 22.6%, while the S&P 500 has barely risen by 0.3%, and Bitcoin has fallen more than 16%.
NVIDIA abandons trillion-dollar deal, cracks appear in AI capital expenditure narrative
$NVIDIA (NVDA.US)$ This week, it was stated that the previously announced $100 billion investment in OpenAI 'is not within the plan,' and the current $30 billion financing arrangement may be the final tranche. The market implications of this statement far exceed the transaction itself.
Bank of America Merrill Lynch noted that the price peak of software ETFs coincided precisely with NVIDIA's announcement of the investment in September 2023. Now, NVIDIA's withdrawal could be a potential leading signal of a deceleration in the exponential growth of AI capital expenditures.
Once this trend is confirmed, it will become the best catalyst to reverse two major trades: the first being the "shorting tech bonds" trade (represented by widening Oracle CDS spreads); the second being the "long semiconductors, short software" trade (i.e., the "AI awe > AI poverty" logic).
Bank of America Merrill Lynch emphasized that the bottoming out of the software sector is critical, as it is highly correlated with the trends in private credit and bank loans. This week, bank loan funds saw their largest outflow in three months ($900 million), and the bank loan ETF (BKLN) approached the "credit event" threshold zone. Strategists believe that the key technical support for current market stability lies in the software ETF holding above $80 and the bank loan ETF maintaining above $20, the February lows.
It is worth noting that the Merrill Lynch Bull & Bear Indicator remains in the extremely bullish zone at 9.2, issuing a sell signal. According to a global fund manager survey, emerging markets, European equities, and bank stocks are still significantly overweight, indicating that if the market continues to decline, the selling pressure on these assets cannot be underestimated.
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