The Commodity Supercycle: How Physical Assets Are Outperforming Technology on Wall Street

In a striking market paradox of this decade, the asset class performing best is also the one least owned by investors. Since October 2020, when we first called for a multi-decade supercycle in commodities, broad commodity indices like the S&P GSCI have surged 200%; gold has climbed 140%. This year alone, commodities have risen 37%, with oil jumping 81%. Supply chain bottlenecks have sent prices of gold, copper, silver, coffee, cocoa, oil, and most recently diesel on volatile rides. Yet the overarching trend remains unchanged.

The Asset Performance Divide

While commodities have soared, traditional tech investments have also posted impressive gains. Cryptocurrency indices have increased by 157%, the Nasdaq has risen 145%, and the S&P 500 has gained 117%. By investor returns, physical assets have significantly outperformed technology. However, this performance hasn't translated into meaningful portfolio allocation.

Comparative Asset Performance

The Fundamental Asset Allocation Problem

Energy and basic materials represent less than 6% of the S&P 500, a figure that's one-third below the historical long-term average. In the early part of this decade, institutional investors used sustainability arguments to reduce exposure to physical assets while simultaneously pouring money into green energy—an industry that requires vast quantities of raw materials like copper. Six years later, these exceptional returns haven't prompted significant reallocation.

The Supply Crisis and Demand Surge

What makes this situation even more noteworthy is that investment in artificial intelligence is creating the largest resource demand in history. Major tech companies—the "Magnificent Seven"—will spend nearly $800 billion this year, with nearly half going to raw materials and energy, including copper for power transmission and critical minerals for hardware.

The Magnificent Seven vs. The Seven Generous

This creates a striking paradox: the Seven Generous energy companies are returning 14-15 cents of free cash flow per dollar of market value, while the Magnificent Seven tech companies are returning only about 2 cents. The current market has priced assets it needs most at an unreasonable discount.

Roots of Investment Reluctance

This aversion to commodity investment has legitimate reasons, unrelated to current prices. A generation of investors experienced significant losses in the 2010s when investing in energy and metal projects. Today, passive investment vehicles allocate by market capitalization rather than price, leading to purchases of the largest and already trending assets.

The Impending Crisis

The current system is creating a crisis. Record margins aren't being met with new investment. Investors are funding unprecedented demand growth while simultaneously cutting supply. The next crisis, already underway, will be experienced rather than merely discussed.

This paradox is likely to end abruptly, through a physical crisis that cannot be ignored. When that day comes, capital will flow abundantly and at higher costs. This has been evident all along, but simply not owned.

— City AM

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