Monetary policies overview, the monetary landscape is shifting as central banks respond to changing economic conditions.

Howard Marks, co-founder of Oaktree Capital Group LLC, stated on Tuesday that investors who profited during the era of easy money should not expect the same strategies to yield remarkable returns in the future.
 

Concerns Over Market Rationality

Marks weighed in on the current “irrationality” in the market, especially following the recent AI-driven rebound. He cautioned investors against overestimating the fundamentals of high-valuation companies while the Federal Reserve shows no urgency to return to the near-zero interest rates of previous years.

“I don’t believe interest rates will continue to decline or drop to ultra-low levels over the next decade,” Marks remarked at the Hedge Fund Week conference in Miami.
 

High Valuations Under Scrutiny

The success of AI startup DeepSeek has prompted investors to reassess the high valuations of AI giants like Nvidia (NVDA). Marks pointed out, “If you look at Nvidia objectively and calmly, there’s no reason Monday’s news shouldn’t challenge some narratives. It simply showcases a common psychological phenomenon and the market’s irrationality in the short term.”
 

Historical Context

Since the global financial crisis, the U.S. stock market has steadily risen, supported by near-zero Fed interest rates and robust economic growth, alongside investor enthusiasm for AI. The S&P 500 has achieved an annualized nominal total return of 13% over the past decade. However, Marks argues that this trend is unlikely to continue.

In a memo titled "On Bubble Watch" published in January, Marks reflected on a prescient warning he made 25 years ago about investor irrational behavior regarding internet stocks.
 

Current Market Warning Signs

In his latest article, Marks cited warning signals in today’s market, including above-average stock valuations, the widespread AI frenzy, the dominance of the so-called "Magnificent Seven" stocks, and the tendency to "automatically" buy large-cap stocks without considering their intrinsic value.

He also referenced predictions from banks like Goldman Sachs, suggesting that U.S. stock market returns over the next decade could be in the single digits, highlighting high-yield bonds as an attractive alternative.

“If you’re only expecting low single-digit returns from the highly uncertain S&P 500, wouldn’t it be better to target a 7.3% yield from high-yield bonds? Everyone should review their portfolios to ensure they are based on strong and improving fundamentals,” Marks advised.
 

Shift from Stocks to Credit

Marks has recommended shifting focus from stocks to credit in recent memos. While the market has not yet followed this advice, the stock market is at a critical juncture after two consecutive years of returns exceeding 20%. With current valuations being high, investor opinions vary on whether this strong momentum can continue, especially if officials curb interest rate cut expectations.

His comments came just a day before the Federal Reserve concluded its first policy meeting of 2025. Given healthy consumer demand and persistent inflationary pressures, officials are widely expected to keep borrowing costs stable. During the December meeting, policymakers indicated they would likely lower rates only twice this year.

Oaktree Capital, managing $205 billion in assets, is renowned for its focus on high-yield bonds and distressed assets, but it also invests in credit, private equity, and real assets.
 

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.