Bond markets: a comeback after a decade of low yields

Investors in government bonds — in Germany, the United States, Japan or the United Kingdom — have gone through a truly “challenging decade.” Returns were negative or extremely low, which is remarkable in recent financial history.
Today, the environment is becoming more attractive again for bond investors.
The Government Bond Yield Cushion shows how much rates could still rise before current bond yields would no longer offset this increase. Bonds are now protected against a rise of about 50 basis points.

The impact of a potential rate cut

In the event of a recession or financial shock leading to lower rates, bonds could once again become a powerful diversification tool. A decrease of 1 to 2% could generate returns between 10 and 20% — a significant potential, even if it is not our central scenario.

Equity markets: extreme concentration and high valuations

The situation in equity markets has changed little over the past year: the weight of US companies in the MSCI World remains exceptionally high, and US “exceptionalism” is still clearly present.

American companies continue to have a very large weight in global indices.
US exceptionalism remains strong, driven notably by the technology sector.

Within the S&P 500, the 10 largest companies — including the Magnificent Seven — represent more than 40% of the index. This high concentration is a key feature of today’s market environment.

In terms of valuation:

• The S&P 500 trades at around 22 times earnings, implying an earnings yield of about 4.5%
• The 10 largest companies trade at around 30 times earnings, implying an earnings yield of about 3.3%

These valuation levels remain high from a historical perspective.

More attractive opportunities outside the United States.
More reasonable valuations can be found elsewhere:

• Europe: around 15 times earnings
• China: around 12 times earnings

These markets offer attractive earnings yields and more balanced entry points for investors.

“Fire and Ice”: a delicate balance for financial markets

Financial markets are currently evolving in what we call a balance “between fire and ice.”
On the one hand, several factors are supporting a still dynamic economy:

• a monetary policy that remains supportive, with rate cuts expected in the US
• significant fiscal stimulus, particularly in Germany with the end of the Schuldenbremse
• a massive investment cycle in artificial intelligence and capital expenditure
• relatively low oil prices, favourable to growth

On the other hand, certain risks persist:

• a potential reset in valuations, especially among large tech and AI‑related companies
• geopolitical tensions, particularly between the United States and China
• the risk of capital reshoring, notably given US deficits
• the potential return of recession fears or unforeseen events (Black Swans)

A correction in a context of high index concentration could have a significant market impact.

What does this mean for investors?

As long as the “Fire” scenario dominates:

• passive investing continues to perform well
• US equities, mega‑caps, and AI‑related themes remain strong
• inflation‑linked bonds, as well as gold and silver, maintain their appeal

If the “Ice” scenario returns:

• active investing regains an advantage
• bonds fully play their diversification role
• certain currencies, such as the Norwegian krone or the Australian dollar, become attractive again
• value and quality stocks tend to outperform

Free cash flow: a winning strategy

At CapitalatWork, free cash flow is at the core of our investment philosophy.
Strong free‑cash‑flow generation enables participation in robust economic growth (benefiting from “fire”) while offering protection in market downturns (shielding against “ice”).
In more challenging phases, companies capable of sustainably generating free cash flow have historically proven more resilient and better performing.