Very interesting analysis. I share the near-term optimism, but I think the bond market may be sending a more important message than equities are currently willing to acknowledge.
What strikes me is the combination of relatively benign reported inflation and long-term yields nevertheless pushing toward multi-decade highs. If inflation alone cannot explain the move, then the market may increasingly be pricing a structural change in the supply and demand for capital: enormous sovereign borrowing requirements, defense and infrastructure spending, the AI/hyperscaler capex boom, and potentially a higher geopolitical risk premium.
That raises an interesting question: "what if the real risk to equities is not another inflation shock, but a persistently higher cost of capital?"
In that environment, the distinction between companies generating strong cash flows today and "long-duration" businesses whose valuations depend heavily on profits many years into the future becomes increasingly important. The weakness in semiconductors could therefore be worth watching not simply as a technical correction, but as an early indication of this repricing.
At the same time, I agree with the point that there is always a bull market somewhere. Energy/refiners are a good example. Higher geopolitical risk, constrained energy infrastructure and stronger nominal growth could continue to favour sectors with real assets and immediate cash generation.
For me, the key indicator over the coming weeks is therefore the long end of the yield curve. If 30-year yields continue rising while inflation remains relatively contained, we may need to stop asking "When will the Fed cut?" and start asking a much bigger question:
"What is the appropriate valuation for financial assets if the world has entered a structurally higher-interest-rate regime?*"
That could become one of the defining investment questions of the next several years.
Very interesting analysis. I share the near-term optimism, but I think the bond market may be sending a more important message than equities are currently willing to acknowledge.
What strikes me is the combination of relatively benign reported inflation and long-term yields nevertheless pushing toward multi-decade highs. If inflation alone cannot explain the move, then the market may increasingly be pricing a structural change in the supply and demand for capital: enormous sovereign borrowing requirements, defense and infrastructure spending, the AI/hyperscaler capex boom, and potentially a higher geopolitical risk premium.
That raises an interesting question: "what if the real risk to equities is not another inflation shock, but a persistently higher cost of capital?"
In that environment, the distinction between companies generating strong cash flows today and "long-duration" businesses whose valuations depend heavily on profits many years into the future becomes increasingly important. The weakness in semiconductors could therefore be worth watching not simply as a technical correction, but as an early indication of this repricing.
At the same time, I agree with the point that there is always a bull market somewhere. Energy/refiners are a good example. Higher geopolitical risk, constrained energy infrastructure and stronger nominal growth could continue to favour sectors with real assets and immediate cash generation.
For me, the key indicator over the coming weeks is therefore the long end of the yield curve. If 30-year yields continue rising while inflation remains relatively contained, we may need to stop asking "When will the Fed cut?" and start asking a much bigger question:
"What is the appropriate valuation for financial assets if the world has entered a structurally higher-interest-rate regime?*"
That could become one of the defining investment questions of the next several years.
Amen, dear Glenn, Amen.