Investing & Performance | 24 September 2025

CIO Update – Market highs signal solidity, not stress

Stock markets have recently scaled a series of new heights. This can cause consternation among investors concerned the tide will soon turn, but we still see solid potential for risk assets. Coutts’ Chief Investment Officer Fahad Kamal explains why.

Fahad Kamal, Chief Investment Officer

Stock markets have been in rude health recently, repeatedly reaching all-time highs. Investors have benefitted from ongoing economic growth, the artificial intelligence revolution and expectations of lower interest rates.

Yet as the old Persian adage reminds us: ‘This too shall pass.’ With inflation proving persistent and speculation about a potential ‘AI bubble’, some may ask whether it’s time to retreat from equities.

In our view, it is not.

Although all-time highs can feel uncomfortable, they are far from rare. Our research, drawing on data since 1927, shows markets have hit unprecedented peaks around 20% of the time. During that period, returns in the year following an all-time high have outperformed those following other market levels (see chart below).

In an environment where economic and earnings growth are positive, investors should perhaps consider such times to be more ‘normal’ than they initially feel.

Past performance should not be taken as a guide to future performance. The value of investments and the income from them can fall as well as rise and you may not get back what you put in.

Returns have historically been better if investing at all-time highs

Crucially, the current wave of record market returns isn’t built on rampant, unchecked, speculative optimism. It’s built on solid fundamentals.

The global economy continues to grow — albeit at a slower pace — and corporate performance, particularly in the US, remains robust. With central banks expected to provide further support in the coming months, we anticipate a favourable environment for equity investors over the next year.

Valuations can be an investment red herring in the short term

Today’s high-performing equities are undeniably expensive but we believe they remain worth the premium. Here’s why.

Our investment decisions are guided by our disciplined Anchor and Cycle process, which considers both long-term market fundamentals (anchor) and the current phase of the business cycle (cycle).

Our analysis finds that expensive stocks can provide a good indication of potential future returns over several years. But they are far less useful for showing what will happen in the coming months.

The two charts below show the subsequent 12-month and 10-year returns of S&P 500 companies for different price-to-earnings ratios – a measure of a company’s value that compares its share price to how much it earns per share.

They show a far clearer picture over the long term – moderating returns – than the short term. The last 12 months bear this out. US stock market valuations were similar a year ago to today’s levels, and that has not prevented the US equity market rising over the last year.

Relating all this to our Anchor and Cycle thinking, we find the following.

Anchor: With stock prices and profit margins at historic highs, it’s reasonable to expect more modest equity returns over the next five to 10 years. However, it’s worth pointing out that the future is never certain – innovation or unforeseen developments could shift the landscape. And if equities do underperform, other asset classes may compensate. Diversification remains key.

Cycle: Our analysis of the next 12 to 18 months suggests a ‘risk-on’ stance could continue to reward investors. Historically, risk assets perform well during periods of recovery, expansion, or slowdown. At present, we are in a slowdown and have been since the last quarter of 2024. Global GDP grew last year by 3.3%, whereas this year it is expected to be 2.9%, according to the OECD. Slowdowns are often healthy environments for equities – we still see positive growth, just at a slowing rate.

Supportive conditions remain, and so does our stock position

While there has been a lot of noise in markets this year – unpredictable trade policy, geopolitical tension, technological disruption – the most influential factors for equities are that underlying growth, inflation and policy have supported risk assets. We currently expect that to remain the case.

We are therefore still overweight equities with a particular focus on the US, which has benefitted from AI-related tailwinds, and Japan where pro-shareholder corporate policies have supported markets.

Should our cycle indicators signal a decisive shift from slowdown to contraction, we would likely reduce our risk exposure. Until then, our preference for equities remains a sensible position in our view.

This article should not be taken as advice.

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If you are a Coutts client and would like to discuss market developments or your own investments with us in more detail, please contact your private banker.