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Finance
Equity markets: Rethinking all-time highs
Elevated equity markets spook investors, but history suggests that digging into fundamentals and long-term context matters more than reacting to new highs.
In recent months, equity markets have repeatedly reached record highs. When major indices reach such levels, many investors instinctively begin to question their next move: whether caution is now warranted, whether it is time to take profits, or whether those still on the sidelines have already missed their opportunity.
New highs are often portrayed in sensationalist terms, framed as moments when markets have overshot reality. Yet this interpretation is misleading. All-time highs are better understood as a natural feature of functioning capitalist systems. In economies shaped by population growth, technological progress, reinvestment, and moderate inflation, corporate earnings tend to rise over time. Equity indices, which ultimately reflect those earnings, therefore spend a considerable portion of their history near or at record levels.
This perspective is familiar to senior executives in their own domains.
Companies rarely abandon expansion plans simply because revenues or profits have reached new highs. Record results are more often a reflection of successful strategy, rising demand, and improving productivity, rather than excess. Financial markets, for all their noise, are no different. Importantly, this argument only applies to diversified equity markets in economies with positive long-run growth, not to individual stocks, narrow sectors, or speculative manias.
The psychological discomfort of investing at record levels
Despite this logic, many investors struggle emotionally with investing at market highs. Two well-documented behavioral biases are at work.
- Loss aversion: The tendency to experience losses more acutely than gains. A short-term market pullback after investing at the top of a bull market will feel particularly painful, even if it has little bearing on long-term outcomes.
- Anchoring: The tendency to mentally anchor to past price levels, usually lower ones, and perceive current prices as too expensive, regardless of whether fundamentals have improved in the meantime.
Together, these biases create the impression of being too late. Yet markets do not know or care where an individual investor last considered investing. Prices reflect the collective assessment of future cash flows, not regret over missed opportunities.
Of course, not every all-time high is identical.
Valuations: elevated does not mean ungrounded
Of course, not every all-time high is identical. But whether markets are expensively valued cannot be inferred from index levels alone. It requires an examination of underlying fundamentals, particularly earnings.
By this measure, much of the global equity market currently trades close to long-term valuation averages (see Chart 1). The Swiss Performance Index (SPI), for example, is valued at a price-to-earnings (P/E) ratio of about 18, broadly in line with its historical norm. Since 2020, the index has risen by roughly 30%, while aggregate corporate earnings have grown by more than 40% over the same period.
Prices have followed profits, not outrun them.
The US stands out as the main exception, with valuations meaningfully above long-term averages. Yet this, too, requires context. Since 2020, earnings among companies in the S&P 500 Index have more than doubled, by far the strongest growth among major regions (Chart 2). It is therefore unsurprising that the index itself has roughly doubled over that period. Moreover, a lot of the companies driving this growth have strong balance sheets, high returns on capital, and favorable long-term growth prospects.
High valuations may temper long-term expected returns and increase sensitivity to disappointments, but they do not, in themselves, imply imminent reversals.
What history says about all-time highs
History offers a powerful corrective to investor intuition. Far from being rare or destabilizing events, all-time highs are a recurring feature of equity markets over long periods of economic expansion. In the US, where the S&P 500 Index provides a particularly rich historical record, an estimated 7% of all trading days since 1950 have closed at a new all-time high; that is, roughly every 14th trading day.
Furthermore, the data directly contradict the notion that investing at such moments leads to poor outcomes. Across short, medium, and long horizons alike, investors who entered the market at an all-time high have historically fared well. As shown in Chart 3, investments made at record levels have resulted in positive returns after one, three, five, and even 10 years in the vast majority of cases.
Extending the analysis further back strengthens this conclusion. Using US equity data going back to 1926, the average annual returns one and three years after an all-time high have been higher than the average returns following all other possible entry points (see Chart 4). Contrary to the intuition that new highs should prompt caution or retreat, they have historically coincided with periods of above-average subsequent performance. Similar dynamics can be observed in Swiss equities, based on SPI data since 1987, as well as in global markets as represented by the MSCI World since 1986.
Why momentum often persists after new highs
Statistics alone, however, are only part of the story. What matters just as much is why markets often continue to perform well after reaching new highs.
New record levels typically coincide with improving fundamentals: earnings revisions trend upwards, balance sheets strengthen, investment increases, and confidence among corporate decision-makers rises. Such developments tend to unfold over years rather than weeks. The forces that push markets to new highs, such as innovation, productivity gains, or scale effects, rarely reverse abruptly.
In this sense, all-time highs are often less a signal of speculative excess than a confirmation that a favorable economic and corporate earnings environment is in place.
Attempts to time markets around perceived ātopsā rarely succeed.
Navigating markets at record levels
For those allocating capital in such environments, a few principles have proved consistently useful.
- Avoid market timing: Attempts to time markets around perceived ātopsā rarely succeed. Waiting for a pullback often means missing extended periods of positive performance. For investors concerned about short-term volatility, phased investments or regular savings plans can help smooth entry points without abandoning long-term exposure.
- Systematic rebalancing: Maintaining target allocations forces investors to trim positions after strong advances and add exposure after setbacks, which imposes discipline where emotions might otherwise dominate.
- Diversification: Exposure across regions, sectors, and asset classes reduces reliance on any single market narrative and increases the resilience of portfolios over time.
All-time highs are neither default warning signals nor evidence of irrational exuberance.
All-time highs in perspective
All-time highs are neither default warning signals nor evidence of irrational exuberance. More often, they reflect cumulative progress: growing economies, rising productivity, and expanding corporate earnings.
For long-term investors, the key question is not whether markets are at record levels today, but whether they are likely to be higher years from now. History suggests that, by far more often than not, they are.
Markets will continue to experience setbacks and corrections. That is their nature. But they will also, if history is any guide, continue to reach new highs. Those who remain disciplined, diversified and focused on long-term fundamentals are best placed not merely to endure these episodes but to benefit from them. For disciplined investors, all-time highs are not a reason to step aside but instead a reminder that markets reward participation, not perfect timing.
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