Global stocks remain risky as inflation and debt cloud alternatives

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Global stocks remain risky

Highlights

Rising inflation and over $40tn in U.S. debt, with $7.25tn in bills due for refinancing within a year, heighten risks across cash and sovereign bonds.
Elevated government and corporate refinancing needs, plus AI data-centre investments, threaten upward pressure on bond yields and possible near-term equity declines.
Outside expensive AI-linked stocks, valuations in UK, Japan, China, and among mid- and small-caps are closer to historical norms, offering relatively less-stretched opportunities.

Inflation and debt reshape the risk comparison

As reported by the Financial Times, the argument is not that equities are safe, but that rival assets now offer less protection than many investors assume. The commentary points to inflation as a key reason, because cash may preserve its nominal value while steadily losing purchasing power when household costs rise.

The case against treating cash as a haven rests on recent price pressures, including higher energy costs and elevated oil prices. In that setting, companies with pricing power can eventually pass through cost increases, supporting earnings and giving equities at least some inflation hedge over time.

The same scepticism is applied to government bonds. Long-dated sovereign debt can produce heavy losses when yields rise, and even index-linked bonds only outperform if inflation turns out higher than markets had already priced in at purchase.

The article also argues that debt issuance is becoming a larger market risk, especially in the U.S. With more than $40tn of debt outstanding and about $7.25tn in bills needing refinancing within a year, Treasury funding needs, alongside corporate refinancing and AI data-centre financing demands, could push bond yields higher still.

Valuation gaps shape equity outlook

Against that backdrop, the short-term downside for equities can still be severe if bond markets stumble under the weight of new issuance. Even so, the analysis suggests broad stock markets are not uniformly overvalued, and that concentration in a small group of technology names distorts the picture.

While some AI-linked companies appear expensive, markets outside that cluster are described as trading closer to historical norms, including parts of the UK, Japan and China. Removing major tech stocks from U.S. indices also leaves valuations that are presented as more reasonable than headline measures imply.

Specific examples cited include Schneider Electric, whose shares have fallen after its $22.6bn acquisition of a U.S. robotics specialist, Alibaba at roughly two times sales, and oilfield services group SLB at about 12 times earnings. Mid- and small-cap stocks are also highlighted as relatively less stretched, partly because they have largely missed the technology rally and are less reliant on bond-market funding.

In our earlier coverage of rising U.S. Treasury yields and widening fiscal deficits, we explained how borrowing costs above 5% are filtering through to mortgages, federal interest expenses and broader financing conditions. The piece highlighted that persistent heavy Treasury issuance—alongside big funding needs for AI infrastructure—can keep long-term yields elevated, while political gridlock reduces the chances of near-term deficit reduction.

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