Wei Li, global chief investment strategist at BlackRock, asserts that the seemingly contradictory market phenomenon of rising bond yields alongside strong equities is not irrational but rather indicative of a structural shift in the global economy. This shift moves beyond the "Great Moderation" era (1980s-2020), which was characterized by demand-driven growth and readily available supply, allowing central banks to counteract downturns through interest rate adjustments.
Li highlights that the current economic landscape is marked by persistent supply constraints, including labor scarcity, energy security concerns, rewired supply chains, aging populations, and significant government investments in defense and infrastructure. These factors contribute to sustained inflation even when economic growth decelerates. Consequently, central banks face limitations, as they cannot directly influence the supply of critical resources like electricity, labor, or semiconductors.
This new macroeconomic regime introduces a structurally higher cost of capital, further exacerbated by the ongoing artificial intelligence (AI) build-out and escalating U.S. deficits. According to Li, this explains why earnings yields on equities may appear expensive when compared to bonds. Markets are adapting to a reality where economic growth is increasingly dependent on expanding supply rather than solely stimulating demand.
What might initially appear as market contradiction is, in fact, a rational response to these profound changes in the global economic framework. Li's analysis suggests that investors are pricing in a world with different fundamental drivers and constraints than those that defined the previous decades.
