Global markets continue to reach record highs, buoyed by encouraging U.S. corporate earnings and sustained investment in artificial intelligence.
In the U.S., around 30% of S&P 500 companies have now reported results, with an impressive 87% exceeding earnings-per-share (EPS) expectations. Over the past few days, several bellwether firms — Microsoft, Alphabet, and Meta Platforms — have released their quarterly figures, further reinforcing optimism in the technology sector.
Despite the strength in earnings, many market commentators remain cautious, largely citing stretched valuations. Even the International Monetary Fund (IMF) has warned of a heightened risk of a “disorderly” correction given current market levels. Predicting the future is impossible. However, investors can still build portfolios designed to manage inherent risks while remaining positioned to perform across various market environments.
Historically, periods of widespread investor anxiety have often presented attractive opportunities. Interestingly, markets are rallying to new highs even amid lingering concerns — including the ongoing U.S. government shutdown, which in previous cycles might have exerted downward pressure on sentiment. Instead, enthusiasm around technology and AI continues to propel markets upward, prompting renewed discussions of potential “bubble” conditions. Whether or not that proves accurate, history shows that attempting to time the market in anticipation of a downturn has often been financially damaging, as equities tend to rise over the long term.
Investors should therefore focus on understanding their own risk profile, objectives, and drawdown tolerance. Meaningful exposure to risk is often necessary to achieve desired returns, but determining the right asset allocation is crucial. For more defensive investors, we construct diversified portfolios incorporating non-correlated assets. While this may limit upside participation during strong rallies, it provides valuable protection against significant market declines.
As Howard Marks of Oaktree Capital aptly asks:
“Would you feel worse about adopting an aggressive strategy and enduring a market collapse, or about being conservative and missing out on strong gains?”
True diversification means that some holdings will inevitably underperform at times. As Warren Buffett famously said, “I’d rather earn a lumpy 15% return than a smooth 12%.”
So—where do you sit?
Alex Leyland