If you’ve ever tuned into financial news and heard breathless declarations that the market just hit an “all-time high,” you might think it’s time to cash out, move into the bunker in your backyard, or call your investment advisor in a cold sweat (spoiler: don’t do any of those!) And, while it might be the case that the market has moved too far too fast, that is not always the case. In fact, often the next step following a new market high… is another market high. But before we try to draw a blanket conclusion, let’s take a breath and talk about why “all-time highs” are, quite frankly, a lot less dramatic than they sound.
Markets Are Supposed to Hit All-Time Highs
Here’s a not-so-shocking truth: markets go up more often than they go down. I might go so far as to say… that is kind of the point. Over time, stock market indices like the S&P 500, Dow Jones Industrial Average, and Nasdaq 100 have all trended upward, reflecting growth in the underlying economy and the companies that drive it. So yes, we should expect markets to hit new highs regularly. It’s not a fluke; it’s a feature. Imagine being surprised every time your kid grows an inch. “Wow, another all-time height!” Ridiculous, right? That’s how we should treat the market hitting a new high (well, it is not exactly a great analogy as rarely do we shrink as a kid, but you get my point). It’s part of the natural progression. (Author’s note: I was going to use age and the fact that every DAY is an “all-time high”… but thought it might be a little depressing – it was to me! Ha ha)
The Nominal Index Value Is Just a Number
When “experts” scream about a new high in the Dow or the S&P 500, it is also important to remember: those are nominal values. They’re not adjusted for inflation, valuation, or whatever financial metric is relevant to the investors who are in the market. Without giving context, I think talking about market highs (or movement in general) is a bit misleading – useful information, maybe, but nowhere near the full story.
What matters more is valuation—the price you’re paying relative to the actual earnings, book value, or other fundamentals of the companies in the index. Common metrics used to give context often include:
- Price-to-Earnings (P/E) Ratio: How much investors are willing to pay for a dollar of earnings. A high P/E can indicate optimism or overvaluation; a low P/E might suggest value or pessimism. But, it is more complicated than a generalization can cover.
- Forward P/E: Similar to the P/E, but based on projected future earnings. This helps investors assess whether current prices make sense based on expected growth – or, said slightly differently, whether an investor agrees with the market’s projected growth rate.
- Price-to-Book (P/B) Ratio: Compares a company’s market value to its book value. Useful for evaluating asset-heavy sectors like financials or industrials but not unimportant even for more growth oriented sectors. As a CPA, I still see value in understanding the balance sheets for companies (and sectors) to understand where value might be hiding… or precariously high based on the assets and liabilities of a company.
- CAPE Ratio (Shiller P/E): A longer-term, inflation-adjusted view of valuation that smooths out cyclical fluctuations… and a metric that has gained increased visibility in recent years.
For example, the S&P 500 might hit a new all-time high in its nominal value, but if its forward P/E is sitting around the long-term average (say, 16-18), that tells a much more moderate story than the headline implies. In 2024, the S&P 500 reached record levels, but valuation metrics were far from historical extremes seen during the dot-com bubble or even the 2021 surge. That context matters. Or, take the Nasdaq 100: while the index value soared to new heights recently, earnings from major components like Microsoft, Apple, and Nvidia also surged—meaning relative valuations didn’t necessarily expand in tandem. It’s a crucial reminder that prices and valuations don’t always move in together. So, when you hear “all-time high,” don’t just look at the chart and overall number – take a look at relative valuations and other market metrics, cycles and economic data… we do.
Investing at All-Time Highs Isn’t a Cardinal Sin
A common myth in investing is that buying at an all-time high is inherently risky. But there are countless pieces of research which suggest that time in the market beats timing the market. If you’re investing for the long term, odds are you’ll be investing through hundreds of all-time highs… and that is how investing in markets with volatility works. The key is to invest thoughtfully. Focus on fundamentals, stay diversified, and understand your risk tolerance. Don’t let the fear of “buying high” keep you from participating in long-term growth. To be clear, sometimes the high is at a time when valuations are at high levels as well – so we might avoid buying in that scenario. But, just the fact that a market or sector or even stock is at an all-time high should not preclude making an investment.
In conclusion: Relax… but stay engaged and focused (we try to do all three!)
“All-time high” isn’t code for “market crash imminent” or even “you should have had more money in the market”. It just means the system is doing what it’s designed to do: grow. Don’t let headlines drive your decisions. Let valuation metrics, financial planning, and a clear understanding of your investment goals guide you instead. As clients of East Franklin Capital, you have asset allocations that are developed with conversations, discussions, input, goal-setting, etc. and are designed for market volatility… both down and up. There are times to be more defensive and times to be more offensive – but your goals, tolerance for volatility, capacity for volatility, and investment horizon are far more important in that decision process than what the market closed at yesterday. Because in the long run, it’s not about when you invest, it’s about how and why. And that’s something worth getting excited about—even at an all-time high.
