Market Forecasts under the Restructuring of Global Order
PIMCO, the global bond investment giant, recently released a five-year outlook report, clearly indicating that the current market landscape is experiencing structural changes driven by politics rather than economics, overturning the traditional order where economics dictated politics. Against this backdrop, PIMCO advises investors to avoid chasing overvalued stocks and instead focus on the long-term yield potential of high-quality bonds.
Clarida: High-Quality Bonds Become the Choice of the Era
In the report, Richard Clarida, PIMCO's global economic advisor and former Vice Chairman of the Federal Reserve, and his team emphasize that with the ongoing reshaping of the global trade structure and geopolitical alliances during Trump's second term, the structural changes in the market are becoming more significant. He points out, "Politics now not only dominates the U.S. economy but is also gradually impacting the response mechanisms of other major economies."
Thus, investors should reassess asset allocation strategies, focusing more on high-quality bonds that offer relatively stable returns, rather than the increasingly risky U.S. stock market.
U.S. Stocks vs. Treasuries Valuation at Extreme Levels
The PIMCO report especially warns that the valuation of U.S. stocks compared to U.S. Treasury bonds has reached the most expensive level in the past 25 years. According to their calculations, the current equity risk premium is only 0.2 percentage points, nearly zero. This level has only appeared during the last 70 years in 1987 and from 1996 to 2001, during which major stock market crises occurred:
- 1987 "Black Monday" Crash: The stock market plummeted nearly 25%, and the 30-year real U.S. Treasury yield fell by about 80 basis points;
- 2000 Internet Bubble Burst: The stock market cumulatively declined nearly 40%, while bond yields sharply fell during the same period.
PIMCO warns that when the equity risk premium is zero, investors often underestimate systemic risk, whereas bonds provide more attractive safe-haven returns during times of crisis.
Current Market Trends: Optimism in Stocks, Caution in Bonds
Currently, the S&P 500 index is nearing its peak for the year, rising 0.4% on Tuesday, just about 2% shy of the all-time high set in February. The market generally expects that recent trade frictions and the "Liberation Day" tariff impact will ease, providing support for a rebound in risk assets.
Scott Ladner, Chief Investment Officer of Horizon Investments, states that the market expects "extreme tariff levels won't materialize," so the current upward trend in U.S. stock valuations is not unusual.
However, in the bond market, U.S. Treasury yields exhibit more caution and observation. On Tuesday, the 10-year U.S. Treasury yield dropped by only 1 basis point to 4.474%, and the 30-year yield fell by 1.5 basis points to 4.939%, indicating investors' cautious stance ahead of the crucial CPI data release and upcoming long bond auctions.
Market Focus Shifts to Fiscal and Debt Carrying Capacity
Gennadiy Goldberg, U.S. Rate Strategy Head at TD Securities, points out that the upcoming 10-year and 30-year U.S. Treasury auctions will serve as a barometer of foreign investors' confidence in U.S. Treasuries. With the U.S. fiscal deficit continuing to expand, there is market concern that sovereign debt carrying capacity is weakening, especially among foreign holders.
He states, "Beyond the fundamental data, we now need to focus on who remains willing to keep buying."
Risk Reassessment and the Bond Allocation Logic
Overall, PIMCO's warning reflects that the current market is facing a critical period of systemic value reassessment. In the new era where politics drives economics, high-quality bonds may regain strategic allocation value, while the high valuation of U.S. stocks may conceal downside risks. For medium to long-term investors, it is time to rethink the focal point of asset allocation and risk balance strategies.
