Riding the Market Wave

The past three years have delivered equity market returns that have tested both investors’ nerves and imagination. From 2023 through 2026, the S&P 500 Index has compounded well above its long-term average and more than doubled from the trough of October 2022 through the end of last year. Although technology and communication services have led the advance, participation has been broad across sectors and industry groups.

As we look ahead, markets are operating on a set of widely discussed assumptions. If those assumptions shift, markets could weaken or strengthen in response. None of them is guaranteed, and each carries real uncertainty for investors.

•             Productivity and AI driven growth: U.S. labor productivity, after a weak 2022, has recently accelerated, suggesting that technology investment and new business formation may be translating into efficiency gains.

•             Inflation: Measures of inflation have fallen significantly from the post pandemic high, with U.S. consumer price increases currently running in the low 3% range, and many forecasts anticipating longer-term inflation modestly above the Federal Reserve’s 2% target.

•             Monetary policy: With inflation off its peak but not yet firmly at target, central banks have shifted from aggressive tightening to a more balanced stance. Future policy decisions will depend on incoming data

•             Economic growth: Consensus expectations currently point to moderate U.S. real GDP growth over the next several years, supported by productivity, resilient consumption, and fiscal measures.

•             Geopolitical risk: Given heightened tensions in the Middle East, the global markets are pricing in more near-term risk of uncertain outcomes. Additional unexpected geopolitical events, cyber-attacks, or broader conflicts could materially affect global growth, supply chains, and valuations.

•             Dollar outlook: Discussions of “de dollarization” have resurfaced as some countries explore alternative payment systems and increase holdings of gold and other currencies. While the U.S. dollar remains dominant in global trade invoicing, reserves, and cross border financing, a stronger dollar can pressure non-U.S. asset returns for U.S. based investors, while a weaker dollar can contribute to import driven inflation.

•             Fiscal policy: Large structural deficits and a high debt to GDP ratio are now persistent features of the U.S. fiscal landscape. Markets currently assume an ongoing willingness and ability to service the debt, supported by some combination of growth, moderate inflation, and financial conditions.

Our Strategy Group, led by Morgan Roberts, develops and periodically refines our 5-year Capital Market Assumptions intended to help us understand how these and other factors could influence long-term expected returns and risks across asset classes. These assumptions are forward-looking estimates based on current information and are subject to change over time, as additional information becomes available. To be clear, they do not represent a guarantee or promise of future performance. At present, the assumptions suggest the U.S. economy may slow toward an annual growth rate of around 1.5% over the next several years. The group also considers scenarios in which significant economic weakness could lead the Federal Reserve to consider reducing interest rates, as well as scenarios in which rates could move higher again.​

When assessing the U.S. fiscal position, including a debt‑to‑GDP level above 120%, the group considers a range of potential implications, including the possibility that the dollar could weaken relative to other major currencies over time. Ongoing debates over deficits, tariffs, and trade policy factor into how these scenarios could play out.

Against the backdrop of the recent equity market advance, large U.S. equity performance can be framed in relation to current earnings and expected growth. As of October 2026, the forward price‑to‑earnings multiple for the S&P 500 Index is approximately 20x, with the index’s largest constituents trading at higher multiples than the broader index. If those largest constituents are excluded, the resulting forward P/E ratio is closer to long term averages. Valuation, however, is only one input among many and does not by itself predict future results or protect against losses.​

Our internal work also notes that the equity risk premium relative to bonds has, at times, moved toward the lower end of its historical range, reflecting changes in both equity valuations and interest rates. A lower equity risk premium can signal that investors are paying more for expected equity cash flows relative to bonds, which may increase sensitivity to earnings disappointments, rate changes, or shifts in sentiment.

Within equities, some investors are focusing on domestic small and mid-capitalization stocks, which, by certain valuation measures, currently trade at discounts relative to larger cap peers such as the Russell 1000.  Small cap stocks have outperformed large caps in some periods and lagged in others, with greater volatility and steeper drawdowns during economic slowdowns or periods of stress. Any valuation discount needs to be weighed against that risk profile, along with how rates, growth, or policy actually evolve relative to expectations.

Developed international and emerging equity markets also trade at valuation levels that differ meaningfully from the U.S. As of October 2026, the MSCI EAFE and MSCI Emerging Market Free Indices trade at price‑to‑earnings ratios below the S&P 500, in some cases at notable discounts relative to their historical relationship. Lower valuation multiples can offer potential opportunities, but international and emerging markets also carry risks, including currency fluctuations, political and regulatory uncertainty, and different corporate governance standards.

We cannot know precisely when the current market “wave” will crest or when conditions will change in ways that surprise investors. Nevertheless, we believe long‑term investors can benefit from a disciplined approach that combines participation in markets with a healthy respect for uncertainty, recognizing that the range of potential outcomes is wide and that no forecast is infallible. In practical terms, “riding the wave” for us means helping clients align their portfolio with their objectives, time horizon, and risk tolerance, while understanding both the opportunities and the risks inherent in markets.​