Unlike the 1990s tech bubble, today's companies have higher net margins (14% vs. 8%) and better cash flow. This, combined with a rare mix of monetary easing, fiscal stimulus, and deregulation outside of a recession, makes current equity multiples look more reasonable.
Counterintuitively, high-yield corporate bonds are expected to perform better than investment-grade credit. They do not face the same supply headwind from AI-related debt issuance, and their fundamentals are supported by credit team forecasts of declining default rates over the next 12 months.
An anticipated $3 trillion in AI-related spending requires significant debt financing, creating a $1.5 trillion gap. This is expected to cause a 60% increase in net investment-grade bond issuance, creating a supply-side headwind that makes the asset class less attractive despite sound fundamentals.
A new bull market is underway, with a supportive macro environment and AI-driven efficiency gains expected to fuel a broad-based earnings recovery. This outlook has led strategists to upgrade U.S. small-cap stocks, now preferring them over the large-caps which have dominated recent growth.