The Postmodern Portfolio: Navigating a New Paradigm of Alpha and Disruption
Foreword: The End of an Era, The Dawn of a New Paradigm
For the better part of the last four decades, institutional investors navigated a remarkably consistent macroeconomic and market environment. This period was defined by a steady, secular decline in inflation and interest rates, which provided a powerful tailwind to asset valuations and a predictable, beta-driven source of returns. A recent report by Goldman Sachs aptly terms this period the "Modern Cycle," characterized by sustained bull markets fueled by disinflation, falling costs of capital, and an unprecedented expansion of globalization. This era rewarded broad, passive exposure and created a framework where portfolio construction could rely on the reliable performance of a concentrated set of public market leaders.
This era, in our assessment, is over. The confluence of powerful, structural headwinds—persistent inflation, higher long-term interest rates, and the fragmentation of global trade—marks a definitive end to the prior regime. However, this is not a story of diminished opportunity. Instead, a new paradigm has emerged, which we call the "Postmodern Cycle," a phrase also used in a recent Goldman Sachs publication. In this environment, absolute returns at the broad index level are likely to be lower and more constrained. Yet, paradoxically, the potential for alpha generation has never been greater. This is a "pick & mix" market, where the spread between winners and losers will widen dramatically, thereby rewarding astute investors who prioritize strategic diversification and exceptional manager selection over passive, beta-seeking exposure.
The key to navigating this new landscape is to understand its core drivers. The future will be shaped by a set of interconnected, long-term themes; the rise of artificial intelligence, the transition to a new energy economy, and profound advances in healthcare and longevity. These are the same themes outlined in a report by J.P. Morgan, which suggests they will drive significant macroeconomic, geopolitical, and technological outcomes over the next decade. The interplay between these secular forces and the macroeconomic and market dynamics of the Postmodern Cycle will define the investment landscape for a generation of institutional capital.
A Macroeconomic Mosaic: Resilience, Strain, and the Fed's Tightrope Walk
The current U.S. macroeconomic environment continues to present a complex and contradictory picture, one of simultaneous resilience and underlying strain. On the surface, the economy appears robust, with real gross domestic product (GDP) increasing at a brisk 3.3% annual rate in the second quarter of 2025. This marked a significant reversal from the previous quarter's -0.5% contraction and was primarily driven by a decrease in imports and an increase in consumer spending.
Beneath this headline strength, however, the labor market, long a pillar of economic confidence, is showing clear signs of deceleration and weakness. The unemployment rate has slowly climbed to 4.2% and, according to a report by Aerotek, job gains are at their lowest since August 2024. The data from the Bureau of Labor Statistics' Employment Situation Summary reveals an increasingly concentrated jobs market, with nearly half of all growth coming from just one sector: health services and social assistance. This has been accompanied by a decline in wage growth, which has slowed to an annual rate of 3.7% over the last three months, a drop from the 4.0% rate seen throughout 2023 and 2024. The household survey also indicates an overall decline in employment, with a loss of 863,000 jobs since April, according to the Center for Economic and Policy Research (CEPR).
Adding to this complex picture, inflation, despite a series of aggressive policy measures, remains stubbornly above the Federal Reserve's long-term target. Nowcasts for August 2025 indicate that headline Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) inflation are holding at 2.86% and 2.74% respectively, both well above the 2% goal. While this represents a gradual cooling from earlier in the year, it is not a decisive victory over inflation, and core PCE inflation has shown no improvement from its 2024 average of 2.8%.
The Federal Reserve is thus on a tightrope, balancing a weakening labor market against persistent inflation. At its July 2025 meeting, the Federal Open Market Committee (FOMC) held its benchmark federal funds rate at a range of 4.25%–4.50%. However, the unanimous decision of previous meetings was broken by two dissenting members who voted for a 25 basis-point rate cut, citing evidence of labor market weakness. Market sentiment has shifted accordingly, with a high degree of confidence in a September policy pivot. The CME Group's FedWatch tool indicates a 90% implied probability of a 25 basis-point cut at the upcoming meeting.
For institutional investors, this impending pivot should not be misconstrued as a return to the aggressive easing cycles of the past. The central bank is not embarking on a traditional easing cycle from a high inflationary base with a healthy labor market. Instead, any rate cuts are likely to be gradual and data-dependent, constrained by the need to avoid a re-acceleration of inflation. The combination of fiscal pressures from high government debt levels and a trend towards higher term premia will prevent a return to the ultra-low interest rates that were the hallmark of the last two "super cycles". This means that the sustained decline in the cost of capital, a primary driver of index-level returns in the past, will not be a factor in the Postmodern Cycle.
Public Markets: Beyond the Beta of Giants
The public equity landscape, particularly within the U.S., reflects the structural shifts of the Postmodern Cycle. According to a Goldman Sachs report, while U.S. equities are at elevated valuations, they are considered "justifiable" given strong fundamentals, including higher margins and returns on equity (ROE). However, this elevated state comes with a significant and growing concentration risk. The dominance of a small number of technology giants has pushed market concentration to near-historical highs. The report notes that while this has been fueled by "extraordinary profit growth," it has created an environment where a simple passive index allocation is inherently fraught with risk, as a significant portion of returns is tied to a narrow group of companies.
This concentration is not a market malfunction but a defining characteristic of this new cycle. It highlights a fundamental change in the nature of returns. According to Goldman Sachs, and consistent with our own house view, investors should expect more moderate annualized returns at the broad index level, a direct result of these elevated valuations and the absence of a secular decline in the cost of capital. However, Goldman’s report also argues that this environment is "fertile ground for alpha generation". For E&F CIOs with a mandate for superior risk-adjusted returns, this is a clear directive to move beyond concentrated exposures and actively seek diversification across sectors, geographies, and factors.
This requires a fundamental re-evaluation of where growth will come from in the years ahead. While the past decade rewarded "capital-light" business models, a new "capex super-cycle" is now underway, redefining which sectors stand to benefit most. The confluence of the J.P. Morgan and Goldman Sachs reports provides a compelling view into this shift. A J.P. Morgan analysis of the AI revolution forecasts a potential cumulative $48 trillion difference in U.S. GDP from 2026-2050, driven by immense productivity gains. However, this future is not possible without a massive upgrade to physical infrastructure. J.P. Morgan's data indicates that data centers will drive a 17x increase in the U.S. electricity consumption growth rate over the next five years, leading to a near-term spike in capacity costs and a subsequent aggressive expansion of utility capex to meet demand. This symbiotic relationship between the virtual and physical worlds is a central theme of the Postmodern Cycle. Goldman’s view corroborates this, noting that while technology investment has surged, the average age of physical assets has risen. This points to a new wave of investment in the "capital-heavy" sectors of Utilities, Industrials, and Materials, which are no longer just cyclical value plays but essential enablers of the AI revolution and the broader energy and healthcare transformations outlined in the J.P. Morgan analysis.
The Alternative Capital Landscape: A Confluence of Caution and Opportunity
The J-Curve Reimagined
The private capital markets currently present a unique and strategically important opportunity for long-term investors like E&F CIOs. A significant challenge over the last two years has been the stalled "J-curve," the graphical representation of returns over time. Not that any experienced alternatives sector investor would need to read one to know this, but according to a report by MSCI, distributions from private capital funds have slowed significantly across most asset classes, with recent vintages clearly drifting away from historical norms. This has resulted in what The Venture City calls "a pretty stark split in the market".
Importantly, in our view this liquidity trough is not a reason to retreat from private markets but a signal of a unique entry point for patient, long-term capital. General Partners (GPs) are under immense pressure to provide liquidity to their Limited Partners (LPs). A report from EY highlights that private equity firms have amassed more than 30,000 assets waiting to be monetized, with a significant portion (35%) having been held for more than six years. To facilitate exits for these longer-held assets, a large percentage of firms surveyed by EY (40%) said they would be willing to accept a haircut of 5%-10% against their original underwriting, with another 24% willing to accept an even greater discount of 10%-20%. This liquidity crisis is creating a once-in-a-decade opportunity to acquire high-quality, long-held assets at a discount through continuation funds or secondary market transactions. E&F CIOs with available capital can act as the crucial liquidity solution for a constrained market.
Venture Capital: The Age of the Mega-Deal
As we recently discussed in “The Great Recalibration” - within the private markets, venture capital is undergoing a profound transformation. While global VC funding saw a robust surge in Q2 2025, reaching $115 billion, a closer look reveals a highly bifurcated market. This headline figure was driven almost entirely by a small handful of mega-deals, such as the $40 billion OpenAI deal in Q1, with the overall global deal count dropping substantially by 29% from Q1 to Q2. The market has become intensely selective, with capital increasingly flowing to proven, late-stage companies with clear growth trajectories. A report by PitchBook and the National Venture Capital Association (NVCA) highlights this, noting that the share of smaller, sub-$5 million rounds has fallen to a decade low.
This concentration of capital is focused on a few key, future-forward sectors. According to a KPMG report, AI remains a dominant force, with defense-tech and space-tech also attracting significant investor interest. The U.S. remains the epicenter of this activity, accounting for nearly 70% of all global VC investment, fueled by deals for companies like Scale AI and Anduril Industries.
Despite the market's caution, valuations for top-tier startups remain resilient. While public SaaS multiples are around 7.5x revenue, according to SaaSrise, the median multiples for venture-backed SaaS companies have held steady at 10x ARR, demonstrating the premium still being paid for high-growth firms. This is happening even as dry powder, the capital on the sidelines waiting to be deployed, has reached extraordinary levels of over $2 trillion globally. This capital is waiting for the right moment, a moment that will be catalyzed by declining interest rates and a closing of the valuation gap between buyers and sellers.
The Mandate for Manager Selection
In this highly selective and bifurcated environment, the ability to generate returns is tied directly to the quality of manager selection. Vanguard’s analysis indicates that a diversified, global private equity portfolio can outperform global public equities by approximately 3.5% annually over the long term, while also improving the portfolio's risk-adjusted returns. This premium, however, is not guaranteed.
The fundamental driver of outperformance in private markets has always been, and will continue to be, the wide dispersion of returns between top-quartile and bottom-quartile funds. As the J-curve effect takes longer to reverse and the pressure on GPs to return capital intensifies, a passive approach to private markets is a recipe for underperformance. For an E&F CIO, the only way to capture the long-term outperformance of the asset class is to partner with highly skilled, selective managers who can source and execute on high-conviction deals in a constrained market.
The Postmodern Portfolio: Strategic Implications for E&F CIOs
The data, when synthesized, points to a clear conclusion: the traditional investment playbook is no longer sufficient. To achieve the mandate of generating superior risk-adjusted returns in a world of muted public market betas, an investor must embrace the core tenets of the Postmodern Portfolio. The strategic imperative is to move beyond passive exposure and capitalize on the unique opportunities now emerging from the convergence of a new macroeconomic regime and powerful secular themes.
Public Equities: The era of simply holding a concentrated index is over. A prudent approach involves proactively diversifying beyond the dominant U.S. technology leaders. The focus should shift toward identifying and allocating to the sectors that will facilitate the next wave of growth. This includes the "new economy" sectors—Utilities, Industrials, and Materials—that are benefiting from the emerging capex super-cycle driven by AI, defense, and decarbonization.
Alternatives: The liquidity crisis in private markets should be seen as a generational opportunity, not a reason to pause. A well-capitalized E&F CIO should be highly selective in committing new capital, targeting managers with a proven track record in high-conviction, future-forward sectors. Furthermore, this is a unique moment to acquire high-quality, long-held assets at a discount through secondary market transactions and continuation funds.
The Postmodern Cycle is a test of conviction. The challenges are clear—stubborn inflation, economic fragility, and constrained exits. But for E&F CIOs with a long time horizon, this environment provides a unique opportunity to re-underwrite risk and deploy capital into high-quality assets at a discount, thereby setting the stage for outsized returns for decades to come.
Actionable Takeaways for Institutional Investors
The transition to the Postmodern Portfolio requires a thoughtful and disciplined approach. In partnership with advisory consulting, E&F CIOs can execute on the following key takeaways:
Strategic Allocation Review: Conduct a comprehensive review of the current portfolio to identify where capital is misaligned with the Postmodern Portfolio thesis. Develop a plan to shift capital to managers who can source and execute on high-conviction deals in the capital-intensive sectors that will power the next cycle of growth.
Scenario Planning: We suggest CIOs plan for at least two stress scenarios: a stagflation scenario (higher inflation re-ignites, Fed forced to hike further, causing both stocks and bonds to fall), and a recession scenario (inflation falls faster but growth contracts, causing equities to drop while bonds rally). Evaluate how the portfolio would fare in each scenario. In a stagflation case, you’d be grateful for real assets, commodities, and maybe trend-following strategies in your arsenal. In a recession case, your investment-grade bonds and cash buffers would provide crucial ballast and dry powder. Ensure that the portfolio’s spending rule (typically ~5% of a rolling average market value) is sustainable under lower return assumptions. If forward returns are, say, 5% nominal for a 60/40, an E&F spending 5% plus 2% inflation would erode principal. While our diversified strategy aims higher, boards may need to revisit spending policies or fundraising strategies if projections show corpus erosion. It’s far better to adjust course early than to be forced into reactive cuts after a bad market cycle.
Tactical Liquidity Solutions: Leverage expertise to help identify and access specific, high-quality assets now available at a discount in the secondary market or through continuation funds. maintain flexibility to capitalize on dislocations. As the saying goes, “Be fearful when others are greedy, and greedy when others are fearful.” We are now closer to the latter condition in venture and parts of credit markets – fear and caution abound. For a long-term institution, this is precisely when to lean in. This is a time-sensitive opportunity that requires deep market access and transactional expertise.
Top-Quartile Manager Sourcing: In a market where deal flow is down but returns are concentrated in a few hands, manager selection is paramount. Using outside resources, carefully navigate the fragmented private market landscape and identify the top-quartile managers who can generate alpha in this selective environment. This partnership ensures that capital is deployed not just into the right sectors, but with the right partners who can consistently deliver superior returns.
Partner with expertise: In a complex environment, augment your team’s capabilities with external expertise. Engage with advisors like Wind River Capital Strategies to access exclusive deal flow, up-to-date market intelligence, and risk management frameworks tailored for E&Fs. The current cycle is “postmodern” – unfamiliar in many ways – so having seasoned guides at your side can make the difference between merely surviving and truly thriving.
Contact | Connect with our Experts — Wind River Capital Strategies
Sources and Attributions
J.P. Morgan. Navigating the Future: Key themes impacting business over the next decade. September 2025.
Goldman Sachs. Global Strategy Paper No. 72: The Postmodern Cycle and where to invest. September 2025.
PwC, PitchBook, and the National Venture Capital Association (NVCA). Q3 2025 Venture Monitor Report.
Bain & Company. Global Private Equity Report 2025.
S&P Dow Jones Indices and Bloomberg. Data on S&P 500 valuations and market concentration.
Bureau of Labor Statistics and Bureau of Economic Analysis. August 2025 data on Consumer Price Index (CPI), Personal Consumption Expenditures (PCE), unemployment, and GDP growth.
The Federal Reserve. September 2025 statements on interest rate policy and economic projections.
U.S. Bureau of Economic Analysis, Aerotek and Bureau of Labor Statistics, Center for Economic and Policy Research (CEPR), Cleveland Fed, Federal Open Market Committee (FOMC), CME Group's FedWatch Tool, Crystal Funds, MSCI, The Venture City, EY, KPMG, PitchBook-NVCA Venture Monitor, SaaSrise, Finalis, Vanguard, Vanguard's Private Equity Market Outlook, Cambridge Associates