The Great Reset: Why the Doomsayers Are Missing the Mark
How a Global Business and Geopolitical Shift is Driving Market Resilience
The chorus of fear has been deafening. For months, pundits, gurus, and even seasoned economists have been predicting a great financial crash. Today we are hearing that equity futures are lower for the third straight day, so the rumbling will get louder. Yet, global equity markets have climbed what can only be described as a “wall of worry,” with the MSCI World Index rising over 20% in the last year alone. This disconnect is not a sign of an irrational market; it’s a rational response to a fundamental shift—a global business and geopolitical reset. The anticipated crash is likely to be muted, replaced by a rolling recalibration as capital is aggressively reallocated to where new value is being created.
The Engine of Change: A Corporate and Technological Revolution
The market’s underlying strength is not speculative hype but a direct result of tangible changes in business fundamentals and a historic productivity boom driven by technology. We’re in the midst of a transformation on par with the rise of the internet.
Forward-Looking Guidance Trumps Fear: The market is reacting to improved corporate outlooks on revenue and efficiency. Companies like Amazon and Meta have seen their stocks surge after providing optimistic guidance focused on cost efficiency and AI integration. This forward guidance is proving more powerful than backward-looking economic data.
The AI and Automation Leap is Real: This is not just a buzzword; it’s a massive wave of capital expenditure. In 2024, a Stanford/MIT study found that AI tools like GitHub Copilot boosted programmer productivity by more than 55%. AI is now a “digital coworker”. The efficiency gains are spreading across the economy, from farmers using John Deere’s autonomous tractors to factories deploying humanoid robots from Figure AI for repetitive tasks.
Forced Obsolescence is a Tailwind: The need to replace aging assets is a powerful economic driver. The average age of light vehicles in the U.S. has hit a record 12.6 years, creating pent-up demand for new, technologically advanced models.
How Markets Are Adapting: The Great Rotation
A dramatic rotation is underway beneath the surface of the major indices, ruthlessly slicing the new economy from the old.
The Shift from Megacaps: We are seeing significant profit-taking from overpriced giants. For example, in late June 2024, NVIDIA and Oracle saw sell-offs where a 3% drop in just these two companies represented a market cap loss of over $150 billion. This capital is being actively recycled into smaller, more agile companies, such as those in the Russell 2000 index.
The Rise of Stock-Picking: The “one-size-fits-all” market is over. Labor-heavy companies are at a disadvantage due to wage inflation, while tech-enabled firms are thriving. Success now requires a combination of fundamental analysis and technical indicators to identify winners.
Algorithmic Dominance: The “wall of worry” is largely being built by machines. Algorithmic trading now accounts for an estimated 80-90% of trading volume on U.S. exchanges. This creates violent, short-term swings that can confuse individual investors but allow institutions to efficiently reallocate capital.
Why the Next Pullback Won’t Be a Crash
While certain sectors may appear overextended, a full-scale crash is highly improbable because the system’s foundations are stronger than they were before previous downturns.
Corporate Fortitude: U.S. non-financial corporations are sitting on enormous cash reserves, holding over $4.1 trillion in cash and liquid assets at the end of 2023. This financial strength fuels strategic mergers and acquisitions (M&A), with global M&A deal value jumping 55% in Q1 2024, providing a floor under market valuations.
Contained Speculation: The market is poised to rein in excess without causing systemic failure. Margin debt, while high, is a fraction of the total market cap compared to the 2000 dot-com bubble.
Strong Fundamentals: Any pullback is more likely to resemble a “rolling base,” where sectors correct at different times. The S&P 500’s forward P/E ratio, while above the 10-year average, is supported by a projected 11% earnings growth for 2025.
The Geopolitical and Macroeconomic Backdrop
The reset extends beyond business to the global stage.
Military Spending as a Floor: Geopolitical instability is creating durable demand. Global military expenditure reached a record $2.24 trillion in 2023, directly benefiting defense contractors.
The Case for Tangible Assets: In an uncertain world, tangible assets like gold and critical minerals could see significant price appreciation. Central banks are buying gold at a record pace, adding over 1,000 tonnes annually for the last two years, signaling a strong fundamental case for precious metals.
The Investment Outlook: Muted Bears and Steady Growth
The next three years will feel different from the easy-money era of zero interest rates and quantitative easing.
Tighter Financial Conditions: With the Fed having reduced its balance sheet by over $1.5 trillion since 2022 and the bank prime rate at 7.5%, money will be tighter. This environment will reward profitable companies and punish unprofitable speculation.
Realistic Returns: Expect more modest, yet still positive, average annual returns. The S&P 500’s average annual return over the past 10 years is about 12.5%, while the 100-year average is closer to 10%. Achieving an 8-9% total return in the coming years, while a pittance compared to the recent past, would be a solid return.
This will not be an ‘age of austerity’, as I had suggested at the beginning of the year, but the painful yet productive process of a global reset. The markets have already begun the work of pricing it in. It’s crucial for us to continue watching daily price dynamics and analyzing these facts before making investment decisions, as those who subscribe to the doomsayers’ narrative risk being left behind.