Talaria Capital co-CIO Chad Padowitz has said that current market optimism is misplaced given the deep uncertainty clouding the long-term growth outlook.
While the artificial intelligence boom will produce major winners and losers, he argued it is still too early to identify them with the certainty markets are currently pricing in.
“We see so many portfolios positioned as though the next decade can be forecast with pinpoint precision. Investors are willingly paying for companies whose valuations are reliant on earnings years and even decades into the future,” Padowitz said.
“When you pay 20, 25, 30 times earnings for anything you are taking a confident view of a 15-to-30-year time horizon. But the future is unknowable and there are going to be substantial winners and losers from AI.”
The warning comes as US stocks continue to rally, driven largely by AI optimism and growth-oriented tech, despite ongoing disruption to the Strait of Hormuz and rising inflationary pressures.
The S&P 500 surged 16 per cent over April and May alone — a gain that has occurred only four times since 1945 — and has now strung together nine consecutive weeks of gains.
But despite the ongoing bull run, Padowitz argued that the level of market uncertainty demands greater “humility” in how investors value future cash flows.
“It is far easier to have confidence in what a business can generate over the next three to seven years than it is to forecast 15 to 30 years out, yet valuations seem to rely on that level of long-term confidence.”
A particular concern for Padowitz is developed country debt, which he said has become more difficult to address through conventional policy settings such as revenue raising taxes at a time when governments are showing little appetite to reign in their own spending.
“I think there is no political will for austerity. The more likely approach would be some form of financial repression. An example of this is where governments effectively drive inflation to a higher level than interest rates, to reduce the real value of the debt.
“If inflation stays above interest rates, people holding cash lose spending power. Money effectively moves from savers to people that have hard assets, and I think it’s more than likely where the world’s going for most developed world economies.”
He has previously flagged concerns about government debt, particularly in the US, in earlier quarterly webinars.
Back in February, Padowitz’s co-CIO Hugh Selby-Smith said he would be holding “zero” exposure to US Treasuries, believing that future returns on the asset would be negative.
Padowitz has also cast doubt on the prospect of an AI-driven productivity boom, an outcome he said would be an “ideal outcome” for markets at present, but one that would cut against Talaria’s “new era” investment thesis which favours real assets.
“Inflation is likely to remain structurally higher,” he said. “The question is whether investors should focus on the inflation they are told, or the inflation they actually experience.”
The latest US inflation data showed headline CPI climbing to 3.8 per cent in April, its highest reading since May 2023.
As such, Padowitz doubled down on the asset manager’s push for real asset investment, arguing investors should prioritise companies and assets that can withstand higher funding costs, shorter investment horizons and more persistent inflation.
He added that investors should also consider low-duration equities, including value stocks and more diversified sources of return.
“These are companies that don’t have a lot of debt, and therefore good balance sheets. With a world that’s changing with AI, a good balance sheet essentially allows a company to be more nimble – whether that’s making an acquisition or investing in a slightly different business type.”
