Investors Face ‘Very High Hurdle' in 2025's Back Half

Bob Elliott of Unlimited Funds asserts that markets are currently priced for an overly optimistic H2 2025 and beyond, anticipating sustained high growth, disinflation, and US exceptionalism, as evidenced by unprecedented stock-bond performance and elevated earnings growth forecasts. He argues this creates an extremely high hurdle for future returns, requiring drastic policy shifts not currently foreseen. Absent such changes, Elliott warns of an unpriced "late cycle environment" with eroding growth and above-target inflation, highlighting significant mispricing opportunities for global macro strategies.

Analysis

Markets are entering the second half of 2025 with asset prices reflecting a highly optimistic scenario of sustained elevated growth, disinflation, and continued U.S. economic exceptionalism. This positioning is evident in the unprecedented post-tariff recovery of stocks versus bonds and robust earnings growth expectations of 16% for 2026, which have pushed price-to-earnings multiples near 22x. Bond markets are similarly positioned, pricing in high U.S. real yields and growth reminiscent of the pre-GFC boom period, alongside stable 2% inflation and multiple interest rate cuts. Bob Elliott of Unlimited Funds argues this creates a significant mispricing, as the hurdle for generating returns above risk premiums is now exceptionally high. He contends that without drastic and unlikely policy changes—such as significant tariff reductions or aggressive rate cuts—the U.S. is instead on a path toward a late-cycle environment characterized by eroding growth, above-target inflation, and weakening international demand for its financial assets, a combination that is starkly at odds with current market pricing.

Key Decisions for Investors

• Investors with heavy concentrations in U.S. equities and an underweight to bonds should recognize the high degree of optimism priced into these assets and the significant risk should the expected rosy growth outcomes fail to materialize.
• Consider strategies that can capitalize on potential market mispricings, such as global macro approaches that utilize long and short positions across equities, fixed income, and currencies to hedge against or profit from a potential shift to a late-cycle environment.
• Monitor key macroeconomic indicators closely, specifically for signs of eroding U.S. growth, inflation remaining stubbornly above the 2% target, and shifts in international demand for U.S. assets, as these could serve as catalysts for a market repricing.