Dollar Weakness Raises the Potential to Continue for Years
Developed National Treasury Yield Curve Stretch
Hyperscaler Investment Continuity
[This article was reported on "Radar M," a paid media outlet specializing in the capital market of Mail Business, on July 1 (15:05)]
Analysts say the U.S.-centered investment environment, which has continued for the past 20 years, is entering a structural turning point. The intention is that the factors that led to the excess performance of the U.S. market are weakening, so capital reallocation can be considered as emerging countries.
Foreign asset manager Lazard announced on the 1st that it has published the "2026 Global Market Midterm Outlook" report.
The report suggested that the three key prospects that will determine the global market in the future are △dollar weakness △ advanced countries' government bond yield curve sharpening △ non-U.S. stocks relatively strong.
First, he diagnosed that the dollar's current weakness is likely to continue for years to come.
With the dollar index already down about 12.5% since early last year, U.S. policy uncertainty, concerns over the Fed's independence, and a widening fiscal deficit have been cited as factors that will weaken the dollar further.
However, investors are likely to respond by expanding the dollar's foreign exchange hedge rather than immediately reducing the share of U.S. assets.
The government bond market predicted that the yield curve of advanced countries is likely to sharpen. The U.S. fiscal deficit is expected to remain at 6-8% of GDP every year for the next 10 years.
Increased defense and related infrastructure spending by non-NATO members of the United States and the possibility of a reduction in Japanese consumption taxes are increasing the financial burden of each country.
As a result, investors demand a higher term premium and long-term interest rates could rise.
The report predicted that the trend of U.S. exceptionalism will shift in such a market environment and the performance of the non-U.S. stock market will be relatively better.
From 2008 to 2024, the S&P 500 posted returns that overwhelmed other national indices, but the gap has narrowed in the last year and a half.
If the dollar continues to weaken, the return on non-U.S. assets will rise. The rise in discount rates is relatively disadvantageous to U.S. stocks, which have a heavy valuation burden, as the yield curve of advanced government bonds sharpens.
Meanwhile, they took a cautious view, saying that the AI investment craze persists, but there are questions. The U.S. Hyperscaler predicts that capital expenditures will increase by more than 80% year-on-year this year, exceeding $750 billion.
It is predicted that the cumulative investment could reach up to $10 trillion from this year to 2030. However, the rapid technology obsolescence speed and the possibility of long-term generalization of AI were suggested as factors of concern.
It is pointed out that the path is unclear as to whether shareholders will be able to achieve the return on invested capital (ROIC) that they will be satisfied with. Semiconductors were cited as the biggest beneficiaries of the AI investment craze.
Hardware suppliers in South Korea, Taiwan, Japan, and the United States have achieved explosive sales growth and improved profitability, and have also made great profits for investors.
However, in terms of sustainability, it said the market shows the possibility of even reflecting an overly optimistic scenario in prices.
As of the end of June this year, the Philadelphia Semiconductor Index (SOX) surged more than 100% compared to the beginning of the year, and the stock price/earnings ratio (PER) has exceeded 60 times as of the last 12 months.
The report also examined the economic outlook for each major region. The U.S. diagnosed that the re-acceleration of inflation caused by the war in Iran, job insecurity caused by AI, and the K-shaped economic structure could weaken the quality of growth.
As China's dependence on exports is increasing amid a slump in real estate and weak consumer sentiment, structural reforms to strengthen domestic demand are inevitable. However, he evaluated that it is unlikely that the Chinese government will do this.
On the other hand, Europe's economic recovery may be delayed by rising energy prices following the war in Iran, but increased defense spending is expected to support industrial production and technology investment.
Japan believes that if the Bank of Japan (BOJ) raises interest rates and the yen continues to strengthen amid improved capital returns based on corporate governance reforms, the relative attractiveness of U.S. government bonds will decrease, and foreign investments will likely return to Japan.
It also said emerging and Japanese stocks could offer relatively better risk-to-earnings opportunities than U.S. stocks.
Analysts say emerging economies can invest in various growth engines, including AI, with low valuations, and Japan's ROIC could increase thanks to improved corporate governance, changes in corporate acquisition systems, and policies to support domestic demand.
The bond market predicted that emerging bonds with relatively low government debt ratios, more orthodox monetary policy and the possibility of currency appreciation could benefit from the weakening attractiveness of advanced countries' long-term government bonds.
In addition, real assets such as infrastructure are also noteworthy in preparation for prolonged inflation. In particular, it is analyzed that an approach to selecting assets with high contractual price transfer power and limited risk of technology aging, such as toll roads, railroads, and utilities, is desirable.
Ronald Temple Lazard, chief market strategy officer, said, "It does not mean that the U.S. stock market will fall, but I think the driving force behind the U.S. market's overperformance is weakening."
"If you are an excessively biased investor in U.S. stocks, it is worth considering redistributing capital into non-U.S. markets where attractive profit growth, weak dollar, and relatively low valuation benefits are expected," he added.
