Investing.com -- ARK CEO Cathie Wood predicts a productivity-led economic boom and a healthier bull market to follow the rolling recession that has been in place for the past three years. The Federal Reserve’s actions over the past 16 months, which ended in July 2023, have led to a record-breaking 22-fold increase in the Fed funds rate, severely impacting various sectors of the economy.
The housing sector was the first to feel the impact of this cycle. Mortgage rates of 2-3% have left many homeowners unable to afford rates two to three times higher. Existing home sales, which peaked at 6.4 million units in 2022, have dropped 39% with no clear signs of recovery in the past three years.
The auto sales industry has also struggled, with sales stuck in the 15–16-million-unit range, 10-15% below the 17-18 million units typical in an expansion. The manufacturing sector has been contracting since November 2022, despite a boom in AI-related spending on data centers and power.
Small and medium-sized businesses, the backbone of the U.S. economy, have been hit hard. Their optimism levels dropped to those last seen in 2008-09 by June 2022 and remained depressed until the election in November 2024. This optimism is now relapsing due to tariffs and weaker economic activity.
Despite these challenges, the real Gross Domestic Product (GDP) has been propped up primarily by high-end consumers and the government. However, these sectors are now beginning to contract. The Atlanta Fed’s GDPNow is projecting that real GDP dropped 2.5% at an annual rate during the first quarter.
Wood suggests that the current recession should end with clarity on tariff, tax, regulatory, and monetary policies over the next three to six months. If the current tariff turmoil results in freer trade, real GDP growth and productivity should exceed expectations in the second half of this year.
Innovation tends to gain traction during tumultuous times. During the current turbulent transition in the U.S., consumers and businesses are likely to accelerate the shift to technologically enabled innovation platforms including artificial intelligence, robotics, energy storage, blockchain technology, and multiomics sequencing.
These innovation platforms are expected to increase productivity and lower inflation. The cumulative doubling in AI compute units produced has been taking place in less than one year, causing AI hardware and software costs to drop 52% and 45% per year, respectively. This could lead to booming growth conditions.
Wood believes the narrowest “bull market” in history should give way to a much broader-based and healthier bull market. Inflation should continue to surprise on the low side of expectations, supported by the price deflation that is expected to be associated with the five innovation platforms described above.
The seeds for all of these new technologies were planted during the 20 years that ended in the tech and telecom bubble (1980- 2000). While the innovation platforms have been germinating for 25-30 years and are beginning to flourish today, investors have been reluctant to allocate capital to them.
In late-2022, ChatGPT created the “coming of age” moment for this innovation revolution, benefiting the stocks of companies like Nvidia (NASDAQ: NVDA ), Amazon (NASDAQ: AMZN ), Microsoft (NASDAQ: MSFT ), and other cloud companies. However, investors today seem to have little appetite for companies investing aggressively in innovation—especially for those not included in the indexes against which they are measured.
During the past four years, innovation-focused equity strategies have been fighting three headwinds: a narrowing bull market, higher interest rates, and premium valuations. However, Wood believes these headwinds are likely to reverse during the next three to six months.
The valuation of innovation is now in deep value territory. The premium valuation for pure-play innovation strategies like ARK’s Disruptive Innovation portfolio has compressed from 278% relative to the S&P 500 at its quarter end peak in June 2021 to 13.3% in March 2025.
Wood suggests that with valuations at deep discount levels, monetary and policy headwinds poised to reverse, and structural innovation drivers gaining momentum, now is not the time for hesitation. Investors who wait for perfect clarity may find their performance lagging in the most transformative growth cycle in history.
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