Richard Bernstein Advisors (RBA) has issued a warning that surplus liquidity is pushing asset prices to levels far beyond what fundamentals can support, with the current market bubble expanding beyond artificial intelligence (AI) into what it describes as a "full-blown frenzy." Mike Contopoulos, the firm's Deputy Chief Investment Officer, recently stated bluntly, "We are in some sort of a broad-based bubble right now. It's not just AI—crypto, meme stocks, SPACs, investment-grade bonds, high-yield bonds, nothing is immune." This veteran, who boasts 25 years of market experience and previously served as Head of High-Yield Strategy at Bank of America, pointed the finger at loose monetary and fiscal policies, arguing they are the root cause of this valuation party detached from fundamentals.
Contopoulos specifically highlighted that the AI boom is particularly worrying for credit investors. If the AI boom succeeds, bondholders do not get to share in the excess returns; if it fails, they will bear the losses. Currently, the market is increasingly focused on the hundreds of billions of dollars that tech giants have pledged to invest in AI infrastructure—a significant portion of which is expected to be raised through the U.S. debt markets. Data shows that capital expenditures for Microsoft, Alphabet, Amazon, and Meta are projected to grow by 34% over the next year, reaching approximately $440 billion. "The tech sector is going to roll over this year," Contopoulos questioned, "What are investors seeing in tech credit that they're willing to provide 40-year financing for a technology that might be obsolete in five to ten years?"
Presently, RBA, which uses exchange-traded funds (ETFs) for cross-asset class investing, has completely exited the corporate bond market. Just a year ago, it was overweight in this area. "When spreads broke below 90 basis points, for us, the relative value proposition just didn't make sense anymore," Contopoulos explained. As of Wednesday, the risk premium for U.S. high-grade credit had risen to 78 basis points, remaining below the 90 basis point threshold since last May.
Contopoulos warned that credit spreads could widen further this year if the Federal Reserve's pace or magnitude of interest rate cuts falls short of market expectations. Additionally, an economic slowdown that is more severe than anticipated poses another significant risk. Given that corporate bond spreads are already at thin levels, RBA has turned its favor towards the investment value of collateralized loan obligations (CLOs), mortgage-backed securities (MBS), high-grade floating-rate debt, and European equities. "There's nothing more attractive than high-quality European equities," Contopoulos stated, "You have fiscal stimulus, you have fairly accommodative monetary policy, and you have accelerating earnings growth."
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