When Will This Cycle End

WHEN WILL THIS CYCLE END? Dario Perkins

The when-will-this-cycle-end question has been a reoccurring theme in our client interaction over the past 15 years. Yet there was nothing in the macro fundamentals that suggested the end of the cycle was imminent, especially for those who didn’t feel comfortable forecasting a global pandemic. Things are starting to change. A cycle endgame is now coming into view.

Chart 1: Worries about the ‘end of the cycle’ aren’t exactly new Bloomberg trends, news stories

"recession" "End of bull market (RHS)"

ARE WE NEARLY THERE YET? Post-2008 PTSD was strong, and investors spent an entire decade worrying about various black swans that never materialized. They were missing the point. Cycles don’t just die of old age. Either they succumb to their own underlying imbalances, or the Fed murders them in pursuit of lower inflation. Until now, it hasn’t really made sense to worry about the “end of the cycle”.

WHAT COULD EXTEND THE CYCLE? The situation is starting to change. Although the US economy is poised for decent growth over the next 6–12 months, inflation is not going to return to the Fed’s 2% target, and any recovery in the US labour market will quickly run into capacity constraints. We think the consensus is far too dovish on the outlook for the Fed – and that could be a big problem by mid-2027.

WHAT SHOULD INVESTORS DO? Investor interest in the business cycle is usually tied to an “investment clock” perspective. They position their portfolios according to which asset classes/sectors have performed best at that stage of the cycle. Today, investors are trying to time the end of the AI boom. Whether that arrives in 2027 or not, there are opportunities to diversify away from heavy US tech exposure.

WHEN WILL THIS CYCLE END? “Are we nearly there yet?” – words that will strike terror into the hearts of parents with young children as they embark on their summer holidays. There is another version of this phenomenon in financial markets: the “when-will-this-cycle-end” question, which now regularly appears in our client interactions. Back in the 2010s, investors spent an entire decade worrying about the “end of the cycle”. Subprime PTSD was strong, and there was no shortage of potential “black swans” to worry about. As it turned out, most of those conversations were a waste of energy. Not only was the post-GFC expansion the longest in history, but when the cycle ended it was thanks to a global pandemic, an “exogenous shock” that had never featured on the worry lists of macro investors. Unperturbed, cycle-determinism soon returned, with the confusing post-COVID environment a perfect breeding ground for market volatility and fake recession scares. What can we learn from these experiences? The economic cycle is not a simple function of time. Cycles do not die of old age. They end either under the weight of their own macro-financial imbalances (overinvestment, low savings, too much debt, etc.) or because central banks murder them. Cycle-threatening imbalances have been conspicuous by their absence since the GFC; and although central banks came close to murdering the current cycle, they reversed course before inflicting the fatal blow.

Today, the US economy remains in a reasonably healthy situation. Inflation is a bit high, but the FOMC’s doves can take comfort from the US labour market, where employment has only recently started to recover and there are no obvious signs of “overheating”. The hyperscalers may or may not be spending too much on datacenters – the first signs of overinvestment since the subprime boom – but there is still plenty of momentum behind the AI bull thesis. We see no reason why the US expansion can’t continue, at least for another 6–12 months. Look beyond that horizon, however, and the cyclical threats to the US economy seem more ominous. Not only is inflation set to remain above the Fed target for a sixth straight year, posing “credibility” risks, but it won’t take much of a recovery in employment before capacity pressures start to re-emerge in the labour market. Remember, employment is not far from its full potential, and immigration controls are severely restricting the size of the labour…