The Price of Confidence

J.W.M. Turner. Rain, Steam, and Speed

Confidence Game. Confidence is the most expensive currency in markets. Investors trade it freely when liquidity is abundant and hoard it when policy shifts. After two years of extraordinary gains driven by artificial intelligence, fiscal largesse, and monetary complacency, the question confronting markets is whether confidence is priced correctly or has become another leveraged asset. Real yields remain above two percent, signaling investors’ demand for protection amid rising debt and policy inconsistency. Fiscal deficits continue to exceed five percent of GDP, despite record employment. Equity valuations hover near historical peaks, even as earnings breadth narrows. Confidence has replaced fundamentals as the anchor of valuation. In this environment, capital discipline defines success, not exuberance. The cost of confidence is rising, and the gap between perception and performance widens each quarter.

A global equity market, led by a narrow cadre of US technology stocks, provides opportunities. The ethereal promise of artificial intelligence comes at a valuation that is both historically and relatively dear. Confidence has a price. 

Confidence Reigns. Confidence is the most expensive currency in markets. It cannot be printed, legislated, or insured. It is earned through performance, borrowed through liquidity, and destroyed through inconsistency. Investors trade it freely when policy is predictable and liquidity abundant, but they hoard it when the rules begin to change. After two years of extraordinary gains—fueled by artificial intelligence, fiscal expansion, and monetary leniency—the defining question of 2025 is whether confidence remains correctly priced or overvalued.

The quarterly returns hint at the answer: all categories gained (Exhibit 1). Yet, the leadership of gold highlights the paradox: ebullient equity markets with a haven asset leading. Only one is right, and only time will tell. The current structural headwinds suggest equity exuberance will end sooner rather than later.

Across markets, confidence has displaced fundamentals as the anchor of valuation. Real yields above 2 percent suggest investors demand protection amid rising debt and policy uncertainty. Fiscal deficits persist above 5 percent of GDP, even with record employment, while higher borrowing costs strain household balance sheets. Equity markets hover near historical valuation peaks, powered by narrow leadership and declining breadth. The aesthetics of sentiment has replaced the arithmetic of solvency.

Exhibit 1. Asset Class Returns (Third Quarter 2025)

Source: IEX Cloud. CRM Calculations. Total returns from June 30 to September 30, 2025.

This is not irrational exuberance; it is structured belief. It is a system of conviction built on repetition and scale: one that rewards narrative consistency more than earnings consistency. Investors have learned to conflate size with security and innovation with inevitability. The largest firms have become proxies for policy stability, their balance sheets viewed as extensions of sovereign strength. In the modern market, the megacap is not just a company; it is a currency. Technology firms are treated as the sovereigns of the digital economy: states unto themselves whose reach, data, and dominance render them seemingly immune to the business cycle. Meanwhile, leverage, liquidity risk, and stretched valuations are dismissed as relics of the industrial past. Confidence is the collateral of the portfolio: tradable, renewable, and dangerously cyclical.

Yet confidence is not capital; it is leverage disguised as conviction. It multiplies outcomes but does not create value. Each policy pivot, each fiscal deferral, each repricing of real yields adds another layer of fragility beneath the surface calm. Markets now price liquidity as if it were a law of nature rather than a temporary condition. The higher the cost of money, the more investors appear willing to pay for the illusion of permanence—for the comfort of believing that the structures built during zero-rate years can outlast arithmetic.

In this cycle, the premium once reserved for growth has migrated into belief itself: the belief that policy will adapt when stressed, that liquidity will return when summoned, that technology will deliver productivity fast enough to justify its own valuation. Confidence has become the new discount rate, lowering perceived risk even as real risk accumulates.

The coming quarters will test that premise. The spread between perception and performance is widening, and with it, the true cost of confidence. When trust, not capital, determines price, markets are no longer efficient—they are reflexive. In that environment, the ultimate advantage will belong to those who can price conviction precisely, who recognize that discipline, not optimism, is the purest and most enduring form of faith in markets.

CRM View: Confidence has replaced liquidity as the market’s reserve currency. It fuels valuations, sustains deficits, and obscures risk and is not indefinite. In a leveraged world, discipline is the only form of confidence that compounds.

Loose Leverage. Confidence functions as a form of leverage: it amplifies returns during expansion and magnifies losses when the cycle turns. The U.S. economy continues to defy gravity: growth near two percent, unemployment under five, and inflation sticky around three. Yet, the fiscal arithmetic is unsustainable. Federal debt now exceeds 115% of GDP, a ratio not seen since the post-war boom, while interest expense consumes nearly 20% of federal revenue. The path to normalization is narrow. Either taxes rise or expenditures fall. Both are politically costly; neither is market-friendly.

The Federal Reserve’s September rate cut, a modest 25 basis points, acknowledged the slowdown but not a surrender. Real yields remain restrictive, and liquidity conditions are tightening even as nominal rates decline. The paradox of the quarter is that markets interpret easing as confidence while policymakers see it as caution. Yet, the challenge is that nonfinancial leverage has been loose for over 15 years (Exhibit 2). This extraordinary period of expanding financial leverage is unparalleled. These conditions enabled a government and financial markets borrowing binge, which used low yields to earn excess returns.

CRM View: The price of confidence will be paid in lower returns.

Exhibit 2. Nonfinancial Leverage Conditions

Source: Chicago Federal Reserve, retrieved from FRED.

Cheap Financing. When real growth exceeds real yields, capital is accretive. When reversed, confidence outpaces cash flow. For much of the postwar period, that spread defined economic balance. Growth reliably exceeded real yields, allowing both public and private debt to compound without immediate consequence (Exhibit 3). Since the 1980s, the pattern has fractured. Every sustained period of real yield normalization (e.g., 1981, 2000, 2007, and 2023) has inverted the yield curve, signaling the exhaustion of prior excess. As real yields and real growth converge, the precarious situation leaves little margin for error.

For now, investors remain willing to finance fiscal imbalance, yet the arithmetic is unforgiving. When the growth premium collapses, debt service becomes real rather than nominal, and confidence ceases to substitute for solvency. The Fed’s September rate cut was less a stimulus than a signal: a recognition that restrictive real rates are colliding with slowing momentum and tightening liquidity. Markets interpret accommodation as reassurance; policymakers see it as pre-emption. Yet the fundamental tension remains unresolved: either growth must slow or yields must fall. Neither outcome is consistent with sustained prosperity.

CRM View: The equilibrium between growth and real yields is the economy’s fulcrum of confidence. When that balance breaks, valuation compression follows. Policy may smooth volatility, but it cannot repeal arithmetic.

Exhibit 3. Real GDP minus Real 10-year Yield (%, 4 QMA)

Source: Bureau of Economic Analysis and the Federal Reserve System, retrieved from FRED.

Peak Value. The relationship between the wealth/GDP ratio and real yields captures the mechanics of confidence as leverage. When the real cost of capital falls, valuations inflate —not just for equities and bonds, but for real estate and private assets as well. Investors extrapolate low discount rates into perpetuity, raising the price of all future cash flows. Conversely, as real yields normalize, the same leverage works in reverse, compressing valuation multiples and eroding the “wealth illusion” created by cheap capital.

The current wealth-to-GDP ratio is near 4.5, while the real yield is around 2 percent (Exhibit 4). Over the last sixty years, this sits at the upper bound of historical experience wealth, excluding the anomalous pandemic years. This elevated ratio underscores how confidence, not cash flow, now anchors asset prices. Despite higher funding costs and fiscal deterioration, investors continue to ascribe premium valuations to risk assets. The data imply that wealth remains priced for a regime of perpetually low real yields, even as policy has moved decisively in the opposite direction. Unless productivity accelerates materially, either wealth or real yields must lower, with the former more probable. As the cost of capital rises, the “price of confidence” will emerge—caveat emptor.

CRM View: This wealth valuation is unsustainable in this fiscal environment.

Exhibit 4. Ratio of Financial Wealth/GDP to Real 10-Year (%)

Source: Bureau of Economic Analysis & the Federal Reserve System, retrieved from FRED. Data quarterly from 1963. Orange dot reflects the most recent quarter, 2024Q2.

Unknown Exit. The typical private company now enters the public market nearly twice as old as it was in the early 2000s, yet with lower profitability (Exhibit 5). Private capital, buoyed by low real rates and abundant liquidity, has enabled firms to remain private for far longer, nurturing growth but also shielding inefficiency and unsustainable business models. Venture and private-equity investors became the custodians of optimism, financing scale instead of profits, confident that public markets would one day reward momentum over margins. That confidence was rational while capital was free.

The era of zero real yields blurred the line between patient capital and speculative delay. The arithmetic changes as real yields normalize. At some point, the public market will demand earnings rather than perpetual promises. The elongation of the IPO pipeline is a delayed reckoning: an accumulation of risk deferred by private balance sheets rather than resolved through competitive discipline.

The same forces that inflated wealth relative to GDP also inflated expectations of future profitability. Private valuations followed, permitting companies to postpone public scrutiny. Yet maturity does not translate into quality. Age without profitability is duration risk by another name: an asset extended on the assumption that confidence will always be available to refinance it.

Exhibit 5. U.S. Initial Public Offerings Age & Percent Profitable

Source: Ritter, Jay R. 2025. Initial Public Offerings: Updated Statistics. Table 4. Data is a 3-year moving average. Available at: https://site.warrington.ufl.edu/ritter/ipo-data/

Valuing Scale. Over the past decade, median sales have grown steadily as firms are larger, better capitalized, and more mature when they reach the market. Yet valuation multiples have expanded far faster (Exhibit 6). In several recent vintages, investors paid six to eight times annual revenue for businesses that were not yet profitable, even as nominal interest rates rose. The pattern is the purest expression of confidence as leverage. Private markets, saturated with capital, produced scale; public markets, flush with liquidity, priced it as certainty. While the cost of capital fell, the cost of conviction rose, reflected in ever-higher multiples that depended on perpetual growth to justify them.

The irony is mathematical. Median sales have increased, but so have deficits and real yields. The structural forces supporting these multiples — abundant liquidity, fiscal tolerance, and speculative patience — are all receding. The chart thus marks the peak of an era in which scale replaced profitability as the metric of success. The normalization of real yields will compress both valuation and narrative. Charity begins at home, not in the marketplace.

CRM View: As confidence ceases to substitute for discipline, price-to-sales ratios are likely to revert to fundamentals, closing the loop between wealth, age, and profitability.

Exhibit 6. U.S. Initial Public Offerings Median Sales & Price/Sales

Source: Ritter, Jay R. 2025. Initial Public Offerings: Updated Statistics. Table 4a. Data is a 3-year moving average. Available at: https://site.warrington.ufl.edu/ritter/ipo-data/

Full Price. The story is cyclical yet unmistakable: eventually inflated confidence requires settlement. Each surge in IPOs, from the dot-com era to the post-pandemic boom, followed the same pattern: initial euphoria, then underperformance once the cost of confidence came due (Exhibit 7). Adjusting the return for style or market shows that this is not a matter of stock selection or factor exposure: newly listed companies consistently lag after the first three years. IPO returns rise during issuance booms as investors equate novelty with growth, only to fade as fundamentals reassert themselves.

The implication is structural: the premium paid for access to innovation systematically exceeds the realized return. In essence, investors have been overpaying for the story of growth, a recurring tax on confidence. The 2020–2021 cohort, nurtured by private capital, born into negative real yields, and listed amid record valuations, delivered some of the steepest three-year drawdowns on record. As liquidity withdrew and rates normalized, the narrative lost its multiple. The erosion in both the orange and gray bars underscores a simple truth: what leverage builds, arithmetic dismantles.

CRM View: Confidence is not free capital: it is deferred accountability. The coming decade will reward profitability, not promise; discipline, not duration.

Exhibit 7. U.S. Initial Public Offerings 3-Year Return Adjusted for Market & Style

Source: Ritter, Jay R. 2025. Initial Public Offerings: Updated Statistics. Table 19. Available at: https://site.warrington.ufl.edu/ritter/ipo-data/

Discipline Restores Confidence

The third quarter of 2025 ends in paradox. Markets remain strong, yet conviction is fragile. Liquidity is ample, yet costly. Everywhere, the dominant pricing mechanism is not fundamentals; it’s confidence —the world’s most valuable and most leveraged asset.

Equities reflect this imbalance. Performance remains concentrated among megacaps whose scale now substitutes for safety. Diversification merely dilutes narrative exposure. Liquidity belief delays valuation compression. Confidence has become cyclical: rising with optimism, collapsing with arithmetic.

Credit markets mirror this pattern. Public spreads remain tight even as leverage migrates into private hands. The expansion of non-bank credit has not reduced systemic risk: it has re-packaged it without the transparency that once constrained excess. The calm in spreads conceals a deeper fragility: confidence has replaced collateral.

Commodities reveal the emotional core of the cycle. Gold trades on policy disbelief, copper trades on discipline. The divergence marks a shift from growth to preservation, echoing that protection, not production, demands a premium.

Currencies complete the circle. The dollar’s former strength embodies both its privilege and its current peril. It remains the global store of liquidity because no credible alternative exists, not because U.S. policy inspires confidence.

Together, these signals describe a system that prices belief more than it prices risk. When confidence becomes leverage, every market depends on the continuity of faith. The price of confidence is therefore the cost of complacency: invisible until it compounds.

“When markets cease to price risk and instead price belief, every asset becomes a derivative of trust.”

CRM View

The cycle that began with asset inflation now converges toward valuation exhaustion. Fiscal imbalance, real yields above growth, and the migration of risk into private markets erode the margin of error. Stimulus will not determine the next phase, but by discipline: in policy, in allocation, and in conviction.

Confidence acts like leverage when untethered from fundamentals. It magnifies both prosperity and fragility. The investor’s task is no longer to forecast liquidity, but to measure belief.

Discipline does not oppose confidence — it restores it.

This exert is fro CRM's The Price of Confidence, Global Portfolio Strategy 2025 Third Quarter. Read more here.