When Safety Trumps Speculation: Why Treasuries Are a Better Bet Than Tech Stocks

The recent surge in stock prices and bond yields has created the illusion of securing long-term gains while minimizing risk. However, Research Affiliates, a firm with an impeccable track record for predicting market trends, warns investors that this may be exactly what they shouldn’t do.

Research Affiliates’ Asset Allocation Indicator suggests that treasuries are now a better bet than pricey tech stocks. Rising bond yields have made super-safe treasuries an attractive option, while the boom in US large caps has rendered them an extremely poor buy. The contrast is striking – even cash looks like a more appealing prospect than the S&P 500 as a whole.

This flies in the face of conventional wisdom: for years, investors have been drawn to tech stocks like magnets. However, Research Affiliates’ formula suggests that this allure may be short-lived. According to their Asset Allocation Interactive feature, US large caps will yield a paltry 3.2% return over the next decade – adjusted for inflation, that’s a meager 0.6%. The outlook is even bleaker for US large cap growth: at just 1.7%, it trails the CPI by almost a point.

The math behind this prognosis is rooted in bedrock market principles. By incorporating reversion to the mean for price-to-earnings ratios (PEs), Research Affiliates’ formula projects that even the S&P’s elevated valuation will eventually correct itself – albeit at a slower pace than investors might hope. Meanwhile, treasuries and cash are proving surprisingly resilient, with intermediate treasuries yielding 4.6% annually and beating inflation by almost two points.

Investors may soon find themselves reassessing their portfolios as the era of tech-driven speculation appears to be drawing to a close. Research Affiliates’ predictions suggest that even the most vaunted large cap growth stocks – companies like Nvidia, Alphabet, and Tesla – may be due for a tumble in valuation. This would not only erase the gains made by investors but also leave them with a diminished portfolio.

As investors turn their attention to safer assets, emerging markets value, Europe, and US small cap stocks may start to attract more attention. These areas are identified by Research Affiliates’ formula as having potential for strong returns.

For the tech sector itself, this shift in investor sentiment would be a significant blow. After years of dominating market conversations, it’s possible that the era of edge equities is finally coming to an end. Whether investors will heed this warning remains to be seen – but one thing is certain: treasuries and cash are looking increasingly like safer bets than tech stocks.

In an era marked by record stock prices and surging bond yields, Research Affiliates’ guiding principle should not be forgotten: when buying at extremely rich prices, you’ll usually fare poorly in the years ahead.