L1 Capital International on the K-shaped economy and where it's finding value

The US stock market keeps climbing, but underneath the surface, something more complex is happening. David Steinthal, Chief Investment Officer at L1 Capital International, says we're in a K-shaped economy - where some parts are thriving while others struggle - and that's creating opportunities for patient investors.

The wealth divide is getting wider

In a recent investor webinar, Steinthal presented data showing that higher-income people are experiencing stronger income growth across all generations, from Gen Z through to baby boomers. The wealth concentration is stark: the top 1% of US households hold 22% of household wealth, whilst the bottom 20% hold just 3%.

More concerning is the trajectory. Over the past couple of years, the wealthiest households have seen their wealth grow at 10% per annum, compared to just 5% for the bottom 20%.

This divide is playing out in the real world. Steinthal pointed to American Express (NYSE: AXP), which skews towards affluent consumers, seeing strong activity. Meanwhile, McDonald's is "clearly seeing less activity from lower socioeconomic consumers."

L1 Capital International has been reducing its American Express position. "The business is going well, but we think it's fairly valued today, and we're seeing better opportunities elsewhere," Steinthal said.

Interest rates: higher for longer

On interest rates, Steinthal's view hasn't changed much. 

"At the short end, we're still in this situation where rates are staying higher for longer than what the market's expecting, and that remains our view."

Inflation is under control but still above central bank targets, and growth remains reasonable. The US market is pricing in a roughly 50-50 chance of another rate cut in December, but Steinthal isn't focused on the short term. There's a general trend towards rates coming down, but slowly.

More importantly, the 10-year Treasury yield has been stable over the past three years. "That's one of the reasons why the stock market has been doing well because we haven't had rates go up a lot, which will put pressure on asset valuations."

Market concentration at unprecedented levels

The concentration in equity markets has reached extreme levels. The top 10 companies in the S&P 500 now account for over 40% of the market index - unprecedented territory driven largely by the Magnificent Seven tech giants.

Breaking down 2025 returns, Steinthal showed that just 10 companies have accounted for 40% of the MSCI World Index returns year-to-date. The remaining 1,300 companies made up the other 60%.

"It just shows you the market has been really concentrated in the leading companies driving the index higher," he said.

Pockets of froth

Certain areas of the market are showing bubble-like characteristics. Gold, Bitcoin and crypto-related companies, quantum computing, and unprofitable tech have all surged in 2025.

Steinthal drew a parallel to the dot-com era: quality companies have underperformed the broader market more than any time since 1999. 

"We're seeing areas where there's euphoria in the market. And really good businesses...they're lagging behind. People are chasing the growth."

AI: both boom and bubble

Whether AI is a boom or a bubble is dominating headlines, and in Steinthal's opinion, “the short answer is both.” He continues: "From a technology perspective, we think it's a boom. From an investment perspective, there's definitely very high expectations."

The consensus is that the technology itself is transformative and will reshape industries - but questionable business models are getting rewarded simply for announcing AI deals. The uncertainty centres on companies like OpenAI, which are committing hundreds of billions of dollars in capital.

"The question is, will they be able to fund it? And even if they can fund it, what will be the return on that investment?" Steinthal said. He expects this to take years to play out, with potential over-investment in the near term, but ultimately, the capacity will get used.

Where L1 International is finding value

Despite strong markets, L1 Capital International's portfolio companies are trading at what Steinthal considers attractive levels. The fund's top 10 holdings all met or exceeded expectations in the recent reporting season.

Amazon (NASDAQ: AMZN) is one area of particular excitement, specifically the retail business. During COVID, Amazon's shipping costs grew faster than unit volumes as everyone rushed online. Now the opposite is happening. "Over the past few quarters, shipping growth has increased at a slower rate than unit growth," Steinthal explained.

Amazon has shifted from a national to regional warehouse system and improved logistics globally. Meanwhile, its advertising business generates nearly $70 billion annually, growing at 20% per annum without requiring the same infrastructure investment.

Another example is Intercontinental Exchange (NYSE: ICE), owner of the New York Stock Exchange and major derivatives exchanges. The company has three divisions with 70% EBIT margins and has increased earnings per share every year for the past decade. The share price has pulled back 20% on concerns about AI disrupting its data business - concerns Steinthal thinks are overblown.

"The data that Intercontinental Exchange has is genuinely proprietary, and therefore their customers will continue to pay to access it," he said. "It's not as exciting as artificial intelligence, but it's a very consistent performer trading at a very sensible valuation."

Booking Holdings (NASDAQ: BKNG) is another holding where L1 International sees opportunity. The market is worried about Google's new AI-powered travel search features, but Steinthal argues Google doesn't want to be an online travel agent dealing with customer service issues. "Google makes their money from search. Booking is still going to have the travel agent role."

Fund performance

The L1 Capital International Fund returned 18% over the 12 months to end October, slightly below the benchmark due to avoiding the frothier areas of the market. Over three to five years, the fund's preferred investment horizon, returns have been strong and exceeded the benchmark.

The fund maintains a broadly diversified portfolio of 20-25 companies across sectors and market caps, though roughly 25% of its holdings are in companies with market caps under $25 billion. The portfolio companies grew revenue much faster than the market in 2024, with higher margins, better cash conversion, lower leverage, and higher returns on capital.

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