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Navigating Lost Decades

Andrew Sarna

Jun 24, 2026

As markets stumbled yesterday, it is a good time to evaluate whether "stocks for the long run" remains an appropriate strategy. While investors have benefited handsomely since 2022, current valuation metrics suggest markets are historically expensive. (ISABELNET)

The current regime is uniquely margin and earnings-driven. S&P 500 trailing margins sit at 14.5% and are projected to reach 16.7% by 2027. While margins have mean reverted for 100 years, the bull case argues that technology has permanently displaced labor to sustain these record levels. (@WarrenPies)

Much of the margin expansion is concentrated in semiconductors, driven by hyperscalers building out data centers at any cost. (@WarrenPies)

Historically priced as a cyclical industry where multiples fell as margins peaked, semis have recently seen multiples explode alongside all-time high margins, signaling either a structural shift or exuberance. (@WarrenPies)

With unsustainable earnings and multiples, comes the prospect of lost decades. While 155 years of U.S. equity data shows an unmistakable upward trend of 7.1% annualized real returns, that same history reveals three distinct "lost decades" where buy-and-hold investors suffered extended drawdowns and impaired compounding. ( Tamarisk Capital Management)

The Great Depression delivered a full quarter-century of zero real returns and left generation-wide behavioral scars. From 1966 to 1982, stagflation and oil shocks drove a -1.77% annualized real return and a 50% drawdown. From 2000 to 2013, the dot-com bust and the Global Financial Crisis resulted in a mere 0.05% annualized real return alongside a 52% drawdown. (Tamarisk Capital Management)

International precedent shows these periods can last even longer. Japan’s Nikkei 225 required 35 years (1989 to 2024) to reclaim its peak, while Europe’s Euro Stoxx 50 and the UK's FTSE 100 took 25 years to recover from their 2000 peaks, proving that eventual recovery within an investor's lifetime is not an immutable law. (Reuters)

This risk is statistically significant. Historically, 10% of 10-year holding periods delivered negative real returns, and 21% returned under 3% annually. Even over 20-year horizons, 3% of periods yielded negative real returns, and 16% fell below 3% annually. (Tamarisk Capital Management)

Lost decades inflict permanent damage because missed compounding cannot be recovered, even if subsequent returns normalize to historical averages. For example, consider two 30-year wealth paths targeting the same 7% average annual return. Path A compounds steadily at 7% each year, while Path B inserts a 13-year interval of zero returns in the middle. Despite having the same arithmetic average return, Path B achieves only 80% of Path A's terminal wealth. This creates a permanent gap that does not self-correct, illustrating why flat periods represent lasting wealth destruction rather than a temporary timing effect. (Tamarisk Capital Management)

And drawdown recovery is asymmetric: a 50% loss requires a 100% gain to break even, which is why the 52% drawdown from the 2000 peak took until 2013 to achieve real recovery. (Tamarisk Capital Management)

Tying it back to the first valuation chart and specifically isolating CAPE, it has only been higher once, during the dot-com bubble. (Tamarisk Capital Management)

The Cyclically Adjusted Price-to-Earnings (CAPE) ratio highlights this vulnerability. Historically, starting CAPE explains 24% of the variance in subsequent 10-year returns and 33% of 15-year returns. (Tamarisk Capital Management)

When historical CAPE was in its lowest quintile (averaging 9.0), subsequent 10-year returns averaged 10.7% with no negative outcomes. In the highest quintile (averaging 29.5), returns dropped to 3.6%, with 24% of outcomes turning negative. Today’s CAPE of 39.9 sits well above the highest historical quintile, a level reached only briefly around 1929 and 2000. (Tamarisk Capital Management)

This is not a market top call, as fortunes are made and lost in manias. With valuations exceeded only once in modern history, the choice is not between optimism and pessimism, but between complacency and preparation.

Playing devil’s advocate; if valuations continue to fail as a predictor of returns, it will likely be driven by two structural mechanisms:

Hyperscaler Capex Cycle: Tech giants lever their massive balance sheets to sustain unprecedented capex, continuing to the semis cycle.
Currency Debasement: Persistent fiscal and monetary expansion inflates the nominal value of assets. Even if real growth slows, nominal equity returns can continue to drift upward simply because the purchasing power of the currency is being debased.

5 Likes

The Biotech Renaissance

Andrew Sarna

Jun 23, 2026

Dario Amodei, the CEO of Anthropic, was recently asked for a stock tip, and his response was that he believes biotechnology will soon undergo a renaissance. ( link to clip)

The first major shift is that drug discovery is becoming dramatically more efficient, though this trend began well before the current AI boom. Over the past decade, the industry has become much better at generating plausible therapeutic assets. The number of discovered drug candidates has roughly doubled, while the number of approved drugs has remained constant at around 50 per year. FDA approvals remain the primary bottleneck, and it is not clear that AI will solve this immediately but the FDA did unveil a package of regulatory tweaks to speed up the process yesterday. (a16z)

The space has also gotten significantly more competitive. In the past 20 years, the number of assets per target has increased by more than 2.5 times, with oncology leading the trend. In 2000, only 16% of the top ten pharma pipelines consisted of "herded targets" (defined as more than five assets pursuing the same target). By 2020, this figure had risen to 68%. (McKinsey)

Performance in the biotech sector has recently rebounded after stagnating post-2021, though it still has not reclaimed those previous highs and has materially underperformed the S&P 500 since 2022. It is also worth noting that the return profile of major pharma is much more stable than that of more speculative biotech companies. (EY)

Dissecting the returns of biotech brings us to some interesting data. The average and median biotech company is quite a poor investment. A few years post-IPO, only about 20% of these companies show positive returns. An investor is actually more likely to be down more than 80% than up 100%. As the data shows, investing in biotech is closer to investing in venture capital than large-cap U.S. stocks, which makes sense because these are mostly pre-revenue companies. (JPM)

In recent years, despite increasing pipelines, the biotech universe has been contracting, meaning there have been more acquisitions and closures than IPOs. (EY)

This contraction has not been driven by an M&A boom, as M&A deals have been running fairly close to the average for the previous decade. (EY)

IPOs are certainly down from levels seen in 2021. The contraction could potentially be explained as a hangover from the 2021 bubble, where lower-quality assets found a window to go public. The current contraction represents these companies going out of business as easy money evaporated from the market. (EY)

Biotech investors have been anxiously awaiting a major M&A wave, recognizing that large pharma needs to backfill revenue that is set to go off-patent in the coming years.(FT)

More than a third of revenues from major pharma companies comes from M&A. Biotech serves as a vital pipeline for future revenues, even though organic revenues also increased over the past decade. (EY)

Today, an increasing amount of R&D is coming from China. The country is emerging as a major competitor to the U.S.-led system, mirroring a broader trend seen across almost every other industry, will the outcome of lower costs and gutting of Western industry be the same? (EY)

The number of venture-backed funding rounds is slowly declining, but the average round size has grown in recent years. (EY)

It remains unclear where the majority of AI-related value will ultimately accrue. However, given the complexity and rapid evolution of the space, I believe specialist managers are best positioned to identify the winners and, with the right partner, generate attractive returns. (Verdad)

5 Likes

Schrödinger's Peace Deal

Andrew Sarna

Jun 22, 2026

US-Iran agreement helped remove a major source of uncertainty, equities pushed higher in the U.S., global markets were mixed, Asia the outperformers. Retail sales exceeded expectations. The macro backdrop revolved around the first Fed meeting under Chair Warsh, and investors walked away with a hawkish message. The Fed left rates unchanged as expected but removed much of its prior forward guidance and placed renewed emphasis on achieving price stability. Tech was the top performing sector, energy was the worst performing sector.

10Y yield down 3 bps in the U.S. and flat in Canada on the week. Commodities were off driven by the alleged re-opening of the Strait of Hormuz and Gold resumed its sell-off, now down 11% this quarter. The Loonie continued to lose ground vs the USD.

Negotiations between the U.S. and Iran have started. After multiple openings and closings, threats, walk-outs and continued Israeli bombings in Lebanon it feels we have made slight progress. For about 24 hours, ships were transiting the Strait with transponders on but that eventually came to an end. Seems like we will get some sort of muddle along scenario where the U.S. and Iran will let enough oil through the strait to prevent an Iranian financial collapse and a global oil crisis, at least through midterms.

While the official data recorded 17 ships saturday, the data reverted on Sunday. It also is apparent that there are dark ships making it through as well.

The market is pricing in the deal. Brent crude speculative short positions are now within 1 million barrels of their December all-time high. Regardless of your view, I continue to believe in the portfolio construction benefits of a position in oil and energy, it should rally in the event negotiations fail, which would likely cause risk assets to sell off, it is a nice hedge. ( Rory Johnston)

Details have began to emerge about the Mythos ban. It allegedly able to break into most of the NSA and Pentagon classified systems. Wonder how true it is. (Economist via @kimmonismus)

An interesting divergence between top AI users and the median. Ramp’s June AI Index shows a ~650-fold spending gap between the top 1% of firms and the median. The question for investors is whether increasing spend brings productive gains. Headlines suggest we are past the point of using AI for the sake of tokenmaxxing, so it’s possible. (@ShanuMathew93)

Going to be very interesting to watch these AI labs monetize. Cheaper Chinese models are currently the ones gaining traction and how many tasks are going to require frontier models? Commoditized services do not have pricing power and are not normally great businesses. At this rate, the top 4 U.S. labs look like they are set to battle it out in the U.S. but as we learned last week, it is reasonable for countries to pursue sovereign AI. (@trevornoren)

Semis have smoked the hyperscalers since late 2022 as the beneficiary of the mobilizing of cash from the hyperscaler balance sheets. Will the hyperscalers lever up, continue the data center buildout and push this further? (GS)

If you told me gold would go through $4000/oz and there would be an oil crisis, I would have guessed that would be a recipe for a stronger CAD. Instead we are approaching multi decade lows. Is this the market acknowledging an over indebted Canadian consumer and low productivity after years of government mismanagement or is CAD undervalued?

CAD is down YTD against most major currencies. ( The Loonie Hour)

Canada briefly had a relative corporate tax rate advantage over the U.S. but Trump enacted measures to close that gap in his first term, could partially explain some struggles in recent years.

6 Likes

Disconnects & Demographics

Andrew Sarna

Jun 19, 2026

Clear data shows how the golden age of private credit and the flood of capital caused spreads to tighten. (Blackrock)

Private credit redemption queues continue to stack up thus far in Q2. (FT)

Manager selection matters a lot more when allocating to alts, difference between the top and bottom quartile is striking. (@LeylaKuni)

The TMX pipeline has allowed Canada to begin diversifying their crude exports away from the U.S. Still a long way to go. I wonder if this is a palatable pitch to the voting base to get pipelines built. ( The Loonie Hour)

Big question for oil is how quickly supply from the Gulf can return to market. Market is currently pricing in a rapid and smooth recovery. (FT)

Energy producers remain disciplined in not overinvesting. (BofA)

Zero-day-to-expiration (0DTE) options have come to dominate option value. I actually don’t know who is driving this, it must be the quants and maybe the multistrats. (BofA)

We’re reaching an interesting point around the world where most of the developed world, China, and Russia will have a declining working-age population going forward. This means fewer workers to pay benefits for retirees, leading to further strain on government finances. (DB)

Inflation since COVID has hit lower income households harder. (KKR)

Energy makes up almost 20% of the bottom quintile's annual spend. Therefore, they are very sensitive to rising energy costs. (KKR)

What could Canada do to encourage these founders to build at home/not leave post University? (Build Canada)

On a per capita basis, Uruguay is actually the soccer power house of the world.

11 Likes

A Hawkish Fed, Equity Issuance, and Investor Positioning

Andrew Sarna

Jun 18, 2026

Below are the key points from the memorandum of understanding between the U.S. and Iran. I find it hard to believe the Americans will actually agree to this. It’s a clear loss if they do. ( Noah Smith)

The latest dot plot reveals a hawkish stance, with nine of 18 officials projecting at least one rate hike this year, six of whom anticipate multiple increases. Only one participant foresees a rate cut, and one official (likely Warsh) did not submit a projection. (@NickTimiraos)

Second wave of inflation and an AI bubble are viewed as the biggest risks to the market by investors. (BofA)

Accordingly, fund managers think semiconductors are the most crowded trade. (BofA)

Fund managers no longer think gold is overvalued after the recent sell-off. (BofA)

Hard to believe this is accurate, but CLSA estimates that rising memory costs mean almost half the cost of data center buildouts is attributable to memory.(@CoorsLightCEO)

Memory costs are projected to increase by nearly 900% in under five years. (wsj)

Scott Bessent is unlikely to lose control of the U.S. bond market given his past experience at Soros, but large U.S. deficits leave the country in a precarious situation. T-bills now account for almost 85% of gross Treasury issuance, near the highest share in over two decades. By tilting issuance toward short-dated debt, the government ties its borrowing costs more closely to the front end of the curve, making its financing increasingly dependent on Fed policy. This is the type of thing you see in emerging markets. (Apollo)

The chart can be updated now that SpaceX has gone public, but the concern remains that the U.S. has never seen this much IPO issuance ever. (KKR)

There is a chance issuance could exceed retirements in 2026. (@Alty_Markets)

But even if net equity issuance is positive, strong dividend growth keeps the net shareholder payout positive. (Gavekal)

Speaking of returning cash to shareholders, investors and the Japanese government are encouraging Japanese corporates to return capital to shareholders as Japanese corporates hold four times the cash relative to total assets compared to peers. (KKR)

The spread between the JGB 10Y and the BoJ base rate has not been this wide in the past 25 years. This is a symptom of inflationary pressures pushing the 10Y higher as the BoJ lags behind. (KKR)

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