Overvaluation Meets Macro Risk: Why This Massive Asset Manager is Getting Bearish | Jim Masturzo | Research Affiliates

May 31, 2026

AI Summary

5 min read

In February 2026, software stocks sold off roughly 30% in a matter of weeks, wiping out trillions in market cap. The trigger wasn't bad earnings or a recession. It was a narrative: that the latest generation of AI models had gotten so good that traditional software companies—the ones selling subscriptions for CRM, HR, and project management—might soon be obsolete. Jim Masturzo, chief investment officer at Research Affiliates, which oversees close to $200 billion, argues that this "SaaS-pocalypse" story is real in some time horizons but wildly overplayed in others. The episode is a careful walk through how to separate cyclical risk from secular risk, why the AI trade looks like 2007-era "dance while the music plays," and why the 60/40 portfolio's old promise of bond protection may no longer hold.

The 60/40 Fallacy and the New Diversification Problem

For decades, investors relied on a simple rule: when stocks fall, bonds rise. Masturzo calls this a "fallacy." The reason bonds did well during equity selloffs after 2000 was not that they were a reliable hedge—it was that bond yields were in a multi-decade downtrend. "Bonds did well all the time," he says. Now that the correlation between stocks and bonds has turned positive—both sold off together in 2022 and again recently—the old portfolio model breaks down.

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What you'll learn

1 (01:29) **Stocks and Bonds Selling Off Together** - Jim explains why the 60/40 portfolio model is breaking down as stock-bond correlation turns positive
2 (04:51) **Inflation Thesis: Why TIPS and Commodities Matter** - Higher future inflation expected due to debt and deficit, making TIPS attractive
3 (06:53) **The Bond Yield Range Trade** - Jim identifies a tactical range for the 10-year: 3.75% to 4.75%, with government likely to cap moves above 5%
4 (10:05) **Yield Curve Control as a Future Possibility** - Jim predicts explicit yield curve control within 5 years, but not immediately
5 (14:09) **Kevin Warsh and Fed Balance Sheet Risks** - Jim downplays near-term hawkish balance sheet reduction despite Warsh’s stated goals
6 (17:28) **Range Still Intact, But Watch Momentum** - Jim sees 10-year yields possibly testing 4.75-4.85% but expects momentum to slow before 5%
7 (20:41) **Research Affiliates’ Multi-Horizon Approach** - Jim describes the firm’s process: start with 5-10 year fundamental outlook, overlay shorter-term economic and momentum signals

+ Full timestamped outline available in the app

Show Notes

Learn More About Unlimited HFGM Global Macro ETF $HFGM: https://unlimitedetfs.com/hfgm

In this episode of Monetary Matters, host Jack Farley sits down with Jim Masturzo, Chief Investment Officer at Research Affiliates, to discuss the changing macroeconomic landscape and the underlying flaws of the traditional 60/40 portfolio. Masturzo explains that the recent positive correlation between stocks and bonds requires investors to find true diversifiers, though he still sees tactical opportunities in trading range-bound bond yields. The conversation explores the AI-driven market narrative, with Masturzo highlighting that the U.S. market is significantly overvalued at a CAPE ratio of 40 and examining the resulting ripple effects on software stock valuations. Finally, he details his bullish conviction trade on commodities amidst severe geopolitical supply chain risks and introduces his firm's new fundamentally weighted RAFI Growth Index.

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Timestamps:

00:00 Market Overvaluation Setup

00:53 Meet Jim Masturzo

01:23 60 40 Under Pressure

02:50 Finding True Diversifiers

06:24 Why Yields Stay Bounded

11:29 Government Backstops And YCC

14:09 Fed Balance Sheet Fears

17:28 Sponsor Break HFGM

19:44 Range Intact Tactical View

25:26 Private Credit Shift Risks

28:36 Stocks Rally And AI Narrative

33:31 CAPE Valuations Explained

36:19 Earnings Growth Skepticism

39:00 AI Adoption Reality Check

45:53 AI Investing Limits

49:26 Why Earnings Forecasts Fail

54:18 SaaSpocalypse and Risk Framework

01:02:37 Valuation Multiples and GAAP Focus

01:06:44 Conviction Trades Commodities and Bonds

01:14:38 Research Affiliates and RAFI Indices

01:16:21 Fundamental Growth Index Explained