Yield Advantage

The global economy continues to recover from pandemic aftershocks, including trade dislocations, outsize monetary and fiscal interventions, a prolonged inflation surge, and bouts of severe financial market volatility. At PIMCO’s 2024 Secular Forum, we explored how the aftereffects of those disruptions are producing some unexpectedly positive developments while also introducing longer-term risks.

Among the positives, disinflation has occurred more rapidly than anticipated in most developed market (DM) economies. Moreover, macroeconomic and inflation risks look more balanced than they did at our prior Secular Forum a year ago. Central banks are also poised to pivot toward rate cuts, likely on different schedules.

However, we see three main areas where investors have benefited but may be overlooking risks that could develop over our five-year secular horizon:

  • Large-scale fiscal stimulus has fueled recent standout U.S. growth, but that exceptionalism has come at a cost: The U.S. is on an unsustainable debt trajectory that the government will ultimately need to address. Meanwhile, financial markets may increasingly need to operate without expectation of government support.
  • Artificial intelligence (AI) is poised to realign labor markets and boost productivity, but significant economic impacts may take years. Massive capital investment has accompanied rapid stock market gains in ways reminiscent of past tech booms.
  • Asset valuations in some markets offer investors little apparent cushion. This includes equities, where valuations appear stretched, and lower-rated corporate direct lending markets that are less liquid and more exposed to floating interest rates.