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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
At some point, I manage to bend most conversations towards my pet obsessions, one of which is climbing.
I am not very good at it. But I do try hard. I bring it up because one of the many reasons I’m not very good at it is that I am a scaredy cat. Manoeuvres such as a big reach, a leap of faith to the next hold or some flourish of fancy footwork all seem a lot easier when you are half a metre off the ground rather than three metres up.
They are the same moves at the bottom of the wall, but up at the top, it feels much harder. (This is bouldering, ropes are not my thing.) Better climbers than me just go ahead and execute the move anyway, safe in the knowledge that either they will pull it off or, if it comes to it, the soft mats will cushion the fall. I, however, am much more likely to wimp out and climb back down.
If it is not too tortured an analogy, I would argue that investors face a similar challenge now. Stocks, particularly in the US, are off to the races. And that makes people nervous. “It’s all one way,” said Joe Davis, global head of the investment strategy group at Vanguard. “I worry about that. I worry when the market seems to be fully pricing in one scenario, good or bad.” But investors need to “stay invested”, he said. Avoiding the asset class purely because big indices are soaring in fact makes very little sense.
Duncan Lamont, head of strategic research at Schroders, said in a recent blog that we should not be “scared” of investing when stocks are at or near record highs. The S&P 500 index hit an all-time high in mid-December, and has since made 7.5 per cent in further gains. This “has left many investors feeling nervous about the potential for a fall”, Lamont wrote. In turn, that deters investors from pulling money out of their rainy-day funds in cash and putting it to work in equities. History suggests it should not.
Lamont calculates that US stocks have been at a record high in 30 per cent of the 1,176 months going back to 1926. If anything, the market performs slightly better in the 12 months after a record is struck, churning out 10.3 per cent above inflation compared with 8.6 per cent the rest of the time.
The adage that it is time in the market that matters, rather than timing the market, also holds. Resisting the temptation to jump out of stocks around the time of record highs delivers meaningful benefits. If you switch in to cash at those points, then over 10 years you lose 23 per cent of your wealth, he calculates.
“There may be valid reasons for you to dislike stocks,” he wrote. “But the market being at an all-time high should not be one of them.”
Even on that point, though, it is getting harder to justify disliking stocks. Results in late February from chips monster Nvidia were, in the words of one banker, a “mic drop moment” for the dwindling band of stock market bears. Investors have, quite reasonably, been openly wondering whether the 250 per cent ascent in this stock over the past year or so is the real deal or a sprinkling of bubble dust. But the company’s results silenced the doubters. It churned out an eye-popping 265 per cent rise in quarterly revenues, which reached a massive $22.1bn, beyond even the rosy estimates of Wall Street analysts.
Chief executive Jensen Huang declared a “tipping point” in AI technology and the shares added 17 per cent, giving the company around a $2tn market capitalisation.
Even before Nvidia’s results, Goldman Sachs had already raised its target for where the S&P 500 will end this year to 5,200, having raised it to 5,100 only in December and initially pegged it at 4,700 just weeks before. The index is now a little over 5,000.
UBS is also encouraged by the fact that tech earnings are catching up with sky-high equity valuations. “The [Nvidia] results come as a relief for AI bulls, as expectations have improved significantly after the strong year-to-date rally in AI-related stocks,” wrote Solita Marcelli, chief investment officer for the Americas at UBS Wealth Management, in a recent note. “Despite a 24 per cent advance in the tech-heavy Nasdaq since late October last year, we continue to see potential for further gains in technology stocks, especially those that would benefit from the AI revolution.”
It is hard for investors to make the next leap in US stocks when they are already so high up. But the onus remains on the bears to articulate what can push tech stocks in to a decline. For many, a change in mindset may be required.
Late last month, Michael Strobaek, global chief investment officer at Lombard Odier, said he had “materially” increased allocations to US equities, adding that he was undeterred by high valuations. “There is a geopolitical economic battle beginning to accelerate between the major powers,” he said. “I think of US tech frankly as geostrategic bulwarks for the US economy to stay ahead on this battle.”
In a US election year, this may prove to be a useful lens through which to view these stocks, even at their upper extremes. For what it’s worth, I have never properly hurt myself in falling from the top of a wall.
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