Invetsing.com -- U.S. stocks face greater downside risk than bonds ahead of Wednesday’s consumer price inflation report, as equities have rallied despite rising Treasury yields over the past month, BTIG said in a note on Tuesday.

The research firm said investors have little edge in predicting either the CPI reading or the market’s immediate reaction, but argued that current positioning creates an asymmetric setup across asset classes. Since the previous CPI report on July 14, 30-year Treasury yields have risen about 13 basis points while U.S. equities have gained roughly 3%, suggesting bonds have priced in more inflation concern than stocks.

A hotter-than-expected CPI reading could therefore weigh more heavily on stocks, while bonds could initially see yields rise before benefiting if stronger inflation increases expectations for a September Federal Reserve rate hike. BTIG noted that markets currently price about a 51% chance of a September hike, and said stronger inflation could ease concerns that the Fed is behind the curve.

Conversely, a cooler inflation reading would likely provide a larger upside boost to bonds than equities, given the stronger performance of stocks over the past month. BTIG said it sees poor risk-reward for equities and favors downside hedges in the equal-weight S&P 500 and Russell 2000, while Treasury bonds could offer better upside if inflation comes in below expectations.

BTIG also pointed to signs of complacency in equities. The equal-weight S&P 500 has risen about 3% since the last CPI report and is approaching the upper end of its trend channel, while a six-month momentum short basket has climbed 32% above its 200-day moving average, its highest level in more than a decade outside the post-COVID period.

Meanwhile, the five-day moving average of the CBOE Composite Put/Call ratio has fallen to 0.81, among its lowest readings in recent years, suggesting limited investor fear. BTIG also said energy stocks could be approaching a breakout after consolidating for roughly four months, although it warned that the sector remains vulnerable to headline-driven volatility.