In recent months, equity markets have repeatedly reached record highs before pulling back amid the recent geopolitical escalation in the Middle East. When major indices reach record 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. The recent correction has sharpened the underlying question: are record highs meaningful warning signals for investors, or simply a normal feature of rising markets? That distinction matters, because investors often mistake a salient price level for a meaningful investment signal.
New highs are often portrayed in sensationalist terms, framed as moments when markets have overshot reality. Yet this interpretation is too simplistic. In broad equity markets, all-time highs are often a natural feature of growing economies. 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 not that different. Over time, higher index levels often reflect an expanding earnings base, not simply overheated sentiment. Importantly, this argument applies to diversified equity markets in economies with positive long-run growth, not to individual stocks or narrow sectors.
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 at what price level 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. But whether markets are expensively valued cannot be inferred from index levels alone. It requires an examination of underlying fundamentals, particularly earnings. The relevant distinction is not between high and low index levels, but between price moves driven by durable earnings growth and those driven mainly by multiple expansion.
By this measure, much of the global equity market was, even at those recent highs, trading at 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. In other words, the rise in prices appears to have been broadly supported by earnings growth.
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. It is therefore unsurprising that the index itself has roughly doubled over that period. Moreover, many 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.
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 historical record offers little support for the idea that record highs have, in themselves, been reliable signals to reduce equity exposure. Across short, medium, and long horizons alike, investors who entered the market at an all-time high have historically fared very 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.
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 often indicate that the economic and earnings backdrop remains supportive, even if its strength and breadth still need to be assessed case by case.
Attempts to time markets around perceived “tops” rarely succeed.
All-time highs are neither default warning signals nor evidence of irrational exuberance.
All-time highs are neither default warning signals nor, by themselves, evidence of irrational exuberance. More often, they reflect cumulative progress: growing economies, rising productivity, and expanding corporate earnings.
For long-term investors, the key issue is not whether markets are at record levels, but whether the underlying drivers are strong enough to sustain returns over time. Markets will continue to experience setbacks and corrections. That is their nature. But the record suggests that record highs have rarely been reliable reasons to step aside.
Record highs may feel like a warning. Historically, they have been a poor reason to lose one’s nerve.
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