Bubble Talk

Equity markets reached new record highs over the past month, reigniting debate over whether we're in bubble territory. Heightened U.S. equity valuations and concentrated market leadership fuel this concern - but context matters. Markets rarely move in straight lines, and short-term pullbacks, while uncomfortable, are a normal part of the cycle.

The Shiller price-to-earnings ratio and other major valuation metrics point to expensive U.S. equity market conditions relative to both history and global peers. Yet valuation alone is a poor timing tool; expensive markets can stay that way for a long time. We believe valuation is a better guide for long-term return expectations than short-term tactical positioning.

Comparisons to the late-1990s tech bubble often miss a critical point: today's market leaders are fundamentally stronger. While technology's index weight is above that era, so is its earnings contribution. Current mega-cap firms boast strong profits and free cash flow with business models grounded in recurring revenue streams and global scale - a different foundation than the speculative optimism that held up valuations in the dot-com era. Still, concentration risk should not be ignored. The top ten stocks in the U.S. have driven around 60% of this year's gains.

Encouragingly, forecasts suggest profit growth will continue to broaden beyond these giants in 2026. Bull markets usually don't end because they've aged; they need a catalyst - such as tight policy or a deterioration in earnings momentum. By historical measures, this rally could still be mid-cycle.

In our view, equity market gains have been underpinned by healthy fundamentals. We maintain a cautiously optimistic outlook, as we expect that earnings growth will support future returns. To be sure, there are several risks, such as continued labor market deterioration, expanding government and corporate debt levels, hawkish policy shifts, and high expectations around artificial intelligence. While risks don't negate the bigger picture, they certainly warrant ongoing analysis. For now, we retain a tactical risk-on tilt with a preference for equities over fixed income.

INCREASING WEIGHT, INCREASING EARNINGS