Contrary to popular belief, earnings growth has a very low correlation with decadal stock returns. The primary driver is the change in the valuation multiple (e.g., P/E ratio expansion or contraction). The correlation between 10-year real returns and 10-year valuation changes is a staggering 0.9, while it is tiny for earnings growth.

Even with identical acquisition multiples, the higher cost of debt financing today means a new LBO generates an excess return over cash that is 4.5 percentage points lower than it would have during the zero-interest-rate period (ZERP). This presents a major structural challenge for future private equity performance.

Contrary to conventional wisdom, re-accelerating inflation can be a positive for stocks. It indicates that corporations have regained pricing power, which boosts earnings growth. This improved earnings outlook can justify a lower equity risk premium, allowing for higher stock valuations.

Even if an investment thesis for market broadening into new sectors is sound, it can be derailed by macro factors. A spike in interest rate volatility across the entire yield curve can negatively impact all stocks, including those expected to outperform.

The primary near-term risk for equities is not interest rate hikes but a squeeze on liquidity. This is driven by the combination of fading central bank balance sheet support (e.g., reduced reserve management and Treasury buybacks) and accelerating capital demand from a strengthening real economy.

Different valuation models tell conflicting stories about the US market. The Shiller CAPE ratio suggests extreme overvaluation near dot-com bubble highs. However, a reverse DCF model calculating the implied equity risk premium shows the market is only moderately valued, creating a confusing picture for investors.

History shows that markets with a CAPE ratio above 30 combined with high-yield credit spreads below 3% precede periods of poor returns. This rare and dangerous combination was previously seen in 2000, 2007, and 2019, suggesting extreme caution is warranted for U.S. equities.

The long-dated nature of biotech investing makes it uniquely vulnerable to high interest rates. A 5% rate applied over a 10-15 year development cycle can compress valuation multiples by three to fourfold, drastically changing the financial landscape for the industry.

Valuation frameworks indicate 10-year Treasury yields are 25-30 basis points too low. This represents the largest deviation from fair value since the market turmoil following the spring 2023 regional banking crisis, suggesting a strong likelihood of rates rising in the medium term.