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Last week I wrote about bond markets. This week I thought I would do a similar review of where we are with equity markets. But before I start, just after I clicked send on my note last week a soft set of US jobs data came out and government bonds rallied in response. Protection against a slowdown is, in essence, the reason to own some bonds. It was good to see this working in reality, even if only for a couple of days. I wrote last week that I think bonds remain attractive today even with the very real risk of high deficits and high (and growing) government debt levels. I take some comfort from the fact that the last few days offered some support for this view.
When looking at equities I feel that I am (almost) legally obliged to start with valuations. And I don’t think many of you will be surprised to hear that valuations are still expensive (as they have been for much of the last decade):
But before you all rush to sell I am also legally obliged to point out that there is essentially no correlation between valuations and one-year returns (it is for 10 year or longer return periods where valuations really start to matter). So, if it is the next 12 months you are focussed on, the chart above does not tell you much. Selling the market because it is high can also mean missing out on long running bull-markets. Today’s secular bull market started in 2009 and has been going for 16 years but this is still less time than the two secular bull markets that preceded it:
The other comfort I can offer about today’s valuations is that the return on equity earned by corporates today is also higher than it has been in recent history. It makes sense for investors to pay more for companies that generate higher returns and this is what we see them doing today. And much of the valuation premium is concentrated in the large cap Magnificent 7 technology companies. These seven companies grew earnings at an average of 28% year on year in the first half of 2025. That kind of growth (which they have been delivering for a while now) is worth paying up for.
The other platform for equities is the economy. Here the picture is more mixed. The jobs market (both here and in the US) is weakening. Some of this may be AI related: technology employment is now falling as a percentage of the overall economy and unemployment is rising (especially for young people):
But the flipside is much of the rest of the economy remains strong. The recent reporting season for US consumer focussed business was better than many had feared and the outlooks they gave were relatively optimistic. In this spirit, it is more cyclical parts of the market that have been out-performing. Not what you would expect going into a slowdown. And the latest Atlanta Fed GDPNow estimate (which takes in and aggregates the latest data releases) is also pretty strong:
The final parts of the jigsaw are flows and sentiment. As Mr. Buffet said, it can pay to be brave when others are fearful and fearful when others are brave. The last time it paid to be brave was in the height of April’s Trump tariff related sell-off. Today, on our measures, the mood amongst investors is much improved but we still do not see the kind of exuberance it can pay to bet against. And while September and October can be two of the more volatile months of the year, the last quarter has historically been more favourable. As an equity investor, you wouldn’t choose to be starting from today’s historically high valuations. But the rest of the backdrop: from the economy, to flows, to earnings growth is more supportive. Secular bull-markets can run for longer than many think possible at the time and this one has proven pretty durable so far. It may have some life in it yet.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
