Global equities have recently broken out to new highs – now what?

 By Sean Ashton*, OMBA

Equities have climbed a wall of worry indeed. We are now halfway through 2025, and investors have already had to deal with:

• A new Trump presidency in the US, which was initially expected to usher in an era of business-friendly policies but instead resulted in draconian tariff announcements on so-called “Liberation Day” in April leading to a dramatic sell off of equities.

• Escalating concerns about fiscal sustainability in the US – America is currently running record high peace-time / non-recessionary period fiscal deficits as a share of GDP (>6%), with the current administration seeking to cut taxes further in Trump’s “One Big, Beautiful Bill.” US federal debt to GDP is already at 120% and at current deficit levels is likely to rise further – unless nominal GDP can sustainably grow faster than 6% per annum. This appears a tall order – unless inflation is permitted to run hot.

• On the last point, the Federal Reserve has doggedly stuck to a pause in policy rates this year amid escalating criticism from the Trump administration to ease rates. The Fed’s cautious approach has hardened following tariff announcements which it has deemed as posing the risk of “moving us away from our dual mandate goals of low inflation and full employment.”

• The eruption of a new war in the Middle East between Israel and Iran, including recent US involvement with the bombing of Iran’s nuclear facilities by US warplanes. 

Despite all of this, US and global stock indices have staged a remarkable recovery from their intra-year declines and have broken out to new highs. One could be forgiven for being confused by this seeming contradiction.

We believe there are several reasons equities have performed very well from the April lows:

1. Investor sentiment has been poor throughout this period, and bull markets tend to be born on pessimism rather than dying on it.

AAII US Investor Sentiment survey, Bull-Bear Spread (individual investors)

As shown in the chart above, investor sentiment remains well below levels consistent with prior market tops (such as in 2021, immediately preceding the 2022 bear market).

2. Investor positioning - despite an increase in equity ownership, institutional investors remain underweight equities in general and heavily underweight US equities specifically, per the most recent Bank of America Global Fund Manager Survey. As stocks continue to gain ground, the imperative of not losing ground versus ones’ benchmark comes to the fore and this is likely to create further demand for equities as these investors move closer to benchmark weights. 

3. Earnings are growing – and could be even better if tariff risk abates – Q1 proved better than expected and S&P 500 forecast earnings growth for 2025 now stands at around 9%. However, EPS estimates for 2025 peaked in early April – coinciding with Trump’s tariff announcements – and have slipped by 4% since, with analysts factoring in some margin damage from having to absorb tariff inflation. We have witnessed repeated pauses of tariff implementation, with the Trump administration seemingly reluctant to follow through (the ‘TACO’ trade, or Trump Always Chickens Out, was amusingly coined by Wall Street analysts in recent weeks). The end game could be a heavily watered-down result which companies find easier to navigate. Time will tell.

Furthermore, the AI revolution currently being led by the US could well usher in a productivity boom that most of us have not witnessed in our careers or lifetimes. At a company level, this would manifest itself in more output per unit of labour as many tasks previously performed by expensive staff become the remit of an AI “agent.” In short: higher margins and earnings – especially for large companies. We could be surprised at the upside in coming reporting seasons for the most important companies that comprise market-cap weighted indices. 

4. Valuations are high, fueling bearish sentiment of a “bubble” – but these persistent accusations are likely premature. The S&P 500 index now trades at a 12-month estimated forward P/E multiple of 21x. This is unquestionably elevated by historical precedent but remains below peak valuations achieved during Covid and the Dotcom era of the early 2000s (25x forward P/E in the latter case). We could further argue that shifting sector composition within the S&P 500 (greater weighting to high growth tech companies versus mature industrial firms) over this time frame makes index-level P/E multiples less comparable across time frames. Indeed, the forward P/E of the tech-heavy Nasdaq 100 remains 20% below its Covid peak levels. Admittedly, that can also sound like an attempt to justify current levels. In summary: markets are expensive, but not yet at levels of previous bubbles. 

Another metric worth tracking is market concentration: the 10 largest companies in the S&P 500 now account for 37% of market capitalization of the index, while contributing 29% of earnings. While this is very close to record highs (and indicative of the benefits of returns to scale for the current crop of tech behemoths), this gap in value-to-earnings for the largest companies is much narrower than it was at the Dotcom peak – during that time, the ten largest companies accounted for around 27% of market cap, but just 15% of earnings.

5. Unlike in late 2021 and early 2022, we are likely on the cusp of further monetary easing, rather than a sharp tightening cycle as experienced throughout 2022 and into the first half of 2023. The Federal Reserve has cut its policy rate by 100bps from the peak and it appears the only obstacle to continued easing at this point is a fear of tariff-led second round inflation effects that might become persistent. We have yet to see evidence of this in data, and PCE inflation is very close to the Fed’s 2% target so if the FOMC is truly data-led and the tariff impact stays muted, there is likely to be room for substantial monetary easing from current levels. 

So, what should investors do now that equities are making new highs?

For the most part, the best advice is to sit tight and do nothing. 

However, as markets continue to scale new heights, there may be greater temptation to take on even more risk because “everything is working” and markets are forgiving right now. This temptation should be resisted. Don’t start chasing extended stocks just because they’ve gone up a lot recently – if you’re a keen follower of markets, you will most likely start to notice a lot of that happening around you. Remember: risk is generally higher when you feel most complacent and comfortable with your new-found financial gains – not when Donald Trump has just announced draconian tariffs and indices are already 20% below their peaks in a two-month period. 

Bull markets are born on pessimism and die on euphoria. The euphoria part has yet to come.

*Sean Ashton is involved in portfolio management and the investment research process at Omba.