Bubbles, barbells, and inflation risk: November 2025 remix

"Electricity added roughly 1% a year to global GDP via productivity for 32 years. [That] looks pedestrian compared to what I think AI can do."
– Dom Rizzo, T. Rowe Price portfolio manager, July 2025¹

At our latest Asset Allocation Committee meeting, we kept risk exposure neutral but changed our allocation mix. We shifted capital out of core large-cap equities into a barbell of U.S. value and U.S. growth, and we added a modest tilt to small-cap growth. We’re not adding market risk; we’re optimizing our risk budget.

The committee’s tone was constructive but disciplined. U.S. Federal Reserve (Fed) policy is easing at the margin. Artificial intelligence (AI) remains a multiyear theme. S&P 500 earnings remain solid, with the index on track for its fourth straight quarter of double-digit earnings gains.² But valuations are full, there’s crowding in risk assets, and credit micro-signals—such as recent defaults—argue for prudence.

AI spending represents a key swing factor for the committee. Hyperscalers (the operators of hyperscale data centers) have lifted their 2025–2026 capex plans, but questions around return on investment are growing.³ I don’t think we should rely on perpetual multiple expansion. We believe pairing growth with value reduces single-factor risk.

Historic concentration

Equity market concentration isn’t just high—it’s at a record high (Figures 1a and 1b), driven by the rise of the Magnificent Seven (Mag 7) group of stocks.

 

And for all the scrutiny over Mag 7 valuations and a potential AI bubble, a broader range of companies “beneath the surface” are trading at significant premiums. As my colleague David Giroux commented in our 2026 Global Market Outlook webinar, “What really hasn’t been reported [on]…is the, let’s call it, 300 [large-cap] companies that aren’t in secular decline, aren’t part of the AI trade, and have valuations about 15%–20% higher than the rest of the market.”

Many high-quality U.S. large-caps look expensive by historical standards.⁴ At the same time, the overall price-to-earnings (P/E) ratio (forward 12 months) for the S&P 500 Equal Weight is near its 10-year average.⁵ And the MSCI ACWI Equal Weight? It has a modest forward P/E of roughly 15.⁶

Investors are facing barbell valuations.

Broadening

Ultimately, we maintain conviction in our market broadening thesis. As we explain in our latest Global Asset Allocation Viewpoints: “Fed cuts, deregulation, fiscal stimulus and stronger M&A and IPO activity could serve as a catalyst to cyclical upswing and also lead to improving small-cap earnings and valuations.”

The case for international small-caps also remains compelling. Europe’s reinvestment in its domestic economy looks poised to benefit smaller companies, which are more tied to local supply chains and continue to boast attractive valuations.

A bullish setup for EM debt

In our fixed income sleeve, we continue to favor locally denominated non-U.S. debt, partly due to structural headwinds to the U.S. dollar and questions about its role as a hedge. 

Notably, the dollar’s carry premium has faded amid a global policy convergence. Meanwhile, emerging market (EM) real yields remain compelling, and fundamentals are cleaner than in prior cycles. Many EM countries have been disciplined in their budget management.

Asymmetric inflation risks

We’re paying close attention to economic headwinds. However, bullish macro signals such as earnings growth, jaw-dropping levels of AI capex, and resilient spending among higher-end consumers seem likely to overpower them. In addition, concerns over high budget deficits in developed markets and pressure on the Fed to keep ratcheting down interest rates are intensifying. This is creating asymmetric upside risk to inflation. An underweight to long duration bonds and an overweight to inflation-linked securities are two ways we’re managing this risk.

Emphasizing resilience

We believe that a U.S. growth/value barbell strategy, plus a measured small-cap growth tilt, lets us stay invested while spreading factor risk and leaning into where the next leg of earnings breadth can show up.

While economic headwinds bear watching, it’s important to remember how much markets have overcome in recent years: Russia’s invasion of Ukraine, decades-high inflation, more than 500 basis points of Fed rate hikes, major bank failures, and high tariffs.

To quote Head of Global Investments and CIO Eric Veiel, “The age of speculation is giving way to real‑world results, but investors must be mindful that old challenges—valuation, inflation, and geopolitical uncertainty—remain firmly in play.”