The defining feature of today’s equity market is that the equity risk premium has effectively disappeared.
The S&P 500 earnings yield is approximately 3.4%, broadly in line with short-term policy rates (Fed Funds) near 3.6% and moderately below the 10-year Treasury at roughly 4.0%. Historically, equities have traded with a meaningful premium over risk-free assets to compensate for earnings volatility and economic uncertainty. Today, investors are receiving little to no additional return for taking equity risk.
This compression reflects the legacy of the post-2008 monetary regime. For more than a decade, global markets operated under a single framework: abundant liquidity, suppressed interest rates and a persistent premium for long-duration growth. Ultra-low policy rates, quantitative easing and repeated financial-sector backstops pushed capital toward assets whose value depended on distant future cash flows. Technology became the dominant beneficiary, capturing a disproportionate share of equity gains as growth was capitalized at ever-higher multiples.
That cycle now appears fully priced.
At current valuations, large-cap technology is trading at earnings yields that increasingly resemble those of risk-free assets. In effect, investors are paying near-Treasury prices for businesses whose future profitability is becoming more uncertain. When the equity risk premium approaches zero, multiple expansion becomes difficult and future returns must come from earnings growth rather than valuation.
At the same time, the growth outlook for software itself is changing.
The End of the Duration Trade
The post-2008 market rewarded duration. When policy rates were near zero, the discount rate applied to future earnings collapsed, making long-term growth extraordinarily valuable. Software and platform businesses, with scalable models and low marginal costs, became the natural destination for capital.
That environment no longer exists.
Interest rates are structurally higher. Capital is no longer free. The valuation asymmetry that once drove outsized returns in growth equities has narrowed significantly. Technology remains highly profitable, but the combination of strong earnings growth and expanding multiples that defined the previous cycle has largely normalized.
The next phase of the cycle will depend less on valuation expansion and more on where the strongest earnings growth emerges.
AI and the Compression of Software Economics
Artificial intelligence is widely expected to improve productivity across the technology sector. However, it also introduces a structural risk: the commoditization of software.
Several forces are beginning to reshape the industry:
- AI lowers the marginal cost of building and replicating software
- Automation replaces functionality previously sold as premium features
- Open-source models and platform competition accelerate price pressure
- Enterprises consolidate vendors and renegotiate contracts
The result is potential revenue cannibalization across parts of the software ecosystem. Growth may continue, but long-term pricing power is likely to face structural pressure.
This creates a valuation tension. Technology equities are priced as stable, high-quality assets, yet the economics of software are moving toward lower barriers to entry and increasing competition. At a time when earnings yields already resemble risk-free rates, the margin for disappointment is limited.
If the previous cycle was defined by valuation expansion on durable growth, the next cycle may be defined by the compression of growth economics at full valuations.
Meanwhile, the accumulated effects of the past decade’s monetary expansion are becoming visible elsewhere.
Liquidity’s Residual Effect: The Repricing of Real Assets
Credit expansion does not disappear. Over time, it migrates into the nominal value of scarce assets.
Persistent fiscal deficits, ongoing central bank balance-sheet risk and repeated financial stabilization measures have increased the supply of financial claims relative to real assets. Gold, as a monetary metal with no counterparty risk, is one of the primary mechanisms through which this imbalance is expressed.
Several structural forces are reinforcing the move:
- Central bank diversification of reserves
- Sustained fiscal expansion across developed markets
- Periodic banking stress and implicit policy backstops
- Global liquidity growth exceeding real economic output
With gold trading just shy of $4,900 per ounce, the metal is reflecting not short-term inflation expectations but a longer-cycle adjustment to monetary credibility and real asset scarcity.
Unlike the previous cycle, where liquidity expressed itself through higher valuation multiples, the current phase is increasingly expressing itself through higher nominal prices for real assets.
This shift has a direct and powerful effect on the companies that produce them.
The Return of Operating Leverage in Commodities
Gold mining is a high fixed-cost business. Once a mine is operating, costs change relatively slowly. All-in sustaining costs (AISC) for many producers range between $1,200 and $1,600 per ounce.
When the gold price rises, profitability increases nonlinearly.
For example:
- At $3,000 gold and $1,400 AISC, operating margin is roughly $1,600 per ounce
- At $4,800 gold, margin rises to approximately $3,400 per ounce
That represents more than a 100% increase in operating margin from a roughly 60% increase in price.
Because production volumes are relatively stable in the short term, most of this expansion flows directly into earnings and free cash flow. Each $1,000 increase in the gold price can add tens or hundreds of millions of dollars in annual revenue for large producers, with minimal incremental capital required.
In effect, the operating leverage that once defined scalable software businesses is now emerging in the gold-mining sector.
A Sector-Wide Earnings Reset
The impact is already visible across the industry. Major producers are reporting revenue growth rates more commonly associated with high-growth sectors. AngloGold Ashanti recently delivered year-over-year revenue growth exceeding 60% as higher realized prices flowed through financial results.
The same dynamic is evident across mid-tier and smaller producers, where operating leverage is often even more pronounced.
Yet valuations remain anchored to historical commodity assumptions:
- Many producers trade at mid- to high-single-digit forward P/E ratios
- EV/EBITDA multiples remain below long-term averages
- Free cash flow yields are often in the high single digits
This combination is unusual in modern equity markets. Technology companies typically command premium multiples when earnings are growing rapidly. In gold mining today, earnings are accelerating while valuations remain compressed.
The sector is effectively delivering technology-style earnings growth at commodity-style valuations.
A New Market Equilibrium
The shift underway reflects a broader change in how liquidity affects asset prices.
The previous cycle expressed monetary expansion through valuation inflation in long-duration growth assets. The emerging cycle is expressing it through cash-flow inflation in businesses tied to scarce physical resources.
With the S&P 500 earnings yield near Treasury yields, the equity market as a whole offers little risk premium. When investors are not compensated for equity risk and the dominant growth sector faces emerging margin pressure, capital allocation naturally shifts toward areas where earnings growth is both rapid and structurally supported.
Gold producers fit that profile:
- Exposure to scarce real assets
- High fixed-cost operating structures
- Direct leverage to monetary inflation
- Rapidly expanding free cash flow
If gold prices remain structurally elevated, the earnings power of the sector could continue to rise even without further price increases.
When the equity risk premium is effectively zero and the greatest earnings convexity is concentrated in real-asset industries, a rotation of capital is not a tactical trade. It is the rational response to a changing monetary environment.
From Multiple Expansion to Cash-Flow Expansion
The leadership transition now underway reflects a fundamental shift in where operating leverage resides.
The previous decade rewarded duration and valuation expansion on future growth. The emerging cycle favors businesses where nominal prices drive immediate cash-flow expansion.
Gold equities sit at the intersection of these forces. The long-deferred consequences of credit expansion are no longer being expressed primarily through speculative growth multiples. They are increasingly visible in the accelerating cash flows of companies that produce the monetary metal itself.
This represents a new equilibrium for markets – one in which the inflation of the financial system is no longer captured by technology valuations, but by the earnings power of real assets.
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