The risk of a replay of the lost decade in US stocks

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The misallocation of capital in the economy will fuel inflation

The writer is chief executive and chief investment officer of Richard Bernstein Advisors No economic model would have predicted stocks would be at all-time highs and credit spreads would be very narrow after the Federal Reserve raised its benchmark interest rate by 5.25 percentage points since early 2022. Yet, that is exactly what has happened.

First, the Magnificent Seven’s outperformance might be ignoring the broad improvement in corporate cash flows, whereas narrow credit spreads are correctly accounting for the cyclical upturn. This seems reasonable because the US profits cycle is accelerating and roughly 160 S&P 500 companies now have earnings growth of 25 per cent or more. A second scenario could be that the equity market’s extremely narrow leadership is justified because an apocalyptic credit event is lurking.

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