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Capital offence: when growth gets expensive
Global equity markets enter 2026 at one of the most stretched valuation points in modern history. After several years of exceptional returns, today’s market valuation is increasingly dependent on elevated margins, record high capital expenditure and unusually low implied risk premia. CROCI’s analysis suggests that, while headline profitability looks robust, the foundations are becoming more fragile and dispersion across regions, sectors and styles is now very wide.
A turning point for markets?
The dominance of US mega caps and growth investing may be approaching an inflection point. Massive AI driven capital expenditure is accelerating faster than the revenues needed to justify it, echoing – though not yet matching – the excesses of the dot com era. Asset productivity is falling, reinvestment cycles are shortening, and investor risk appetite is priced at levels last seen in the late 1980s. History suggests such conditions rarely persist without either a correction or a prolonged period of below trend returns.
Why value deserves renewed attention
Against this backdrop, CROCI highlights a compelling case for reintroducing value into core equity allocations. Valuation gaps between growth and value have quietly reopened, with the average investor still heavily underweight value after a decade long growth bias. Sectors such as Health Care, Consumer Staples, Utilities and select Industrials offer resilient cash returns, strong balance sheets and more realistic growth expectations. These areas stand out as sources of genuine economic value in an expensive market.
Navigating AI without overpaying
AI remains a transformative force, but CROCI stresses that successful investing will depend less on the scale of spending and more on the returns earned on that capital. While hyperscalers are committing unprecedented sums to infrastructure, innovation opportunities extend well beyond Big Tech. CROCI based growth approaches focus on companies with durable competitive advantages, strong balance sheets and disciplined capital allocation, allowing investors to access growth while managing valuation and reinvestment risks.
The CROCI perspective
CROCI’s cash flow based framework cuts through accounting noise to compare companies on a consistent, economic basis. In a world of high valuations, sticky inflation and rising capital intensity, this disciplined approach aims to identify where markets are over pricing optimism – and where long term investors can still find real value.