The investment landscape is shifting. In the decade leading up to COVID-19, the environment was characterized by low interest rates, easy money, and rapid growth in a handful of dominant technology companies. However, the next 10 years look far less certain.
Persistent inflation, rising borrowing costs, and mounting government debt are creating headwinds that could reshape the way capital is allocated across markets. Are the leaders of the last cycle poised to maintain their dominance? Or will the next decade favor a broader set of opportunities?
One of the most notable shifts is in interest rates—the “era of free money” is seemingly over. While some investors continue to hope for a return to ultra-low interest rates, the yield on the 10-year Treasury, the benchmark for borrowing costs across the economy, remains well below its historical median of approximately 5.5% dating back to the 1960s. This signals that business and investment decisions will need to adjust to a world where capital is no longer cheap.
Source: www.shillerdata.com
Rising federal debt poses additional challenges. Interest payments on government debt are approaching $1 trillion annually—now exceeding most categories of federal spending, including national defense, Medicare, and Medicaid. As aggregate debt continues to climb, the government’s capacity for deficit-driven stimulus is likely to diminish, potentially dampening GDP growth.
Demographic trends further compound these challenges. Declining birth rates and an aging population could slow workforce expansion and economic growth. While recent immigration trends have provided a boost, it is uncertain whether that will continue at the same pace. A shrinking labor force could have profound implications for productivity, inflation, and long-term economic health.
Source: https://usafacts.org/articles/how-have-us-fertility-and-birth-rates-changed-over-time/
Trade policy adds yet another layer of uncertainty. If projected tariff increases come to fruition and onshoring accelerates in response, the combination of a shrinking workforce and trade barriers could result in a higher aggregate inflation rate than in the pre-COVID decade.
Against this backdrop, the narrow dominance of a handful of high-growth technology companies may give way to a more balanced market. The so-called Magnificent Seven—companies that collectively represent approximately $17 trillion in market capitalization—have driven market returns in recent years. However, history suggests that such extreme differentials in valuation between growth and value stocks do not persist indefinitely. Even a modest shift in investor sentiment could prompt a meaningful reallocation of capital away from the most crowded trades and into a broader set of opportunities.
If investors begin to reevaluate where they deploy capital, even a modest reallocation from the most crowded trades could have a meaningful impact on the hundreds of overlooked companies outside of the market’s narrow leadership. Given the changing macroeconomic landscape, we see a compelling case for a more balanced market ahead—one in which traditionally undervalued areas could present significant opportunity.
For a more comprehensive analysis of our investment perspectives and strategies, read our 4Q 2024 commentary.