America to enter new economic super-cycle in 2025, investors may consider high risk small caps, says Bank of America

The previous supercycle was defined by the threat of deflation, prompting policymakers to slash interest rates to near-zero, encouraging risky behavior among investors and consumers alike. This pro-risk environment led to groundbreaking innovations and massive investments in sectors like technology and renewable energy, but it failed to stimulate significant demand, resulting in GDP growth that never exceeded 3%. The turning point came with the government stimulus during the pandemic, which allowed the economy to gain momentum, pushing wages up and fostering healthier growth rates.

What can the new supercycle bring along?

Now, economists predict that the new supercycle will be shaped by three major forces: higher interest rates, geopolitical and economic volatility, as well as serious national-security concerns. Historically, a new economic cycle often begins with a dramatic change in financial rules. The last super cycle was initiated when the Federal Reserve cut its benchmark interest rates to a minimal, a move that sent ripples through global markets. Investors were compelled to take on greater risks as Treasury yields plummeted, leading to an influx of capital into emerging markets and speculative ventures.

Will the economic supercycle be dangerous for the US economy?

This phenomenon suggests a shift in the so-called neutral interest rate—the level that fosters growth without triggering inflation. After the 2008 crisis, this rate fell to zero, but it now appears to have risen above the Fed’s target of 2%. Vanguard predicts that the neutral rate may stabilize around 3.5%. The shift in the neutral interest rate alters the nature of risk, making safer investments like government debt more attractive. With decent returns available from these investments, the appetite for high-risk ventures may diminish.

FAQs:

Is the US economy in danger from an economic supercycle?
There are major fears that a new economic supercycle could be arriving very soon, which could impact major market forces in the United States.

Will the economic supercycle affect high risk small caps?
According to the Bank of America US investors should consider investing carefully in small caps if the economic supercycle indeed arrives in some time.