Buying at a record high can feel like standing at the edge. However, the data shows new highs are a normal feature of a rising market, not in itself a signal to step back. Photo by Erik Mclean on Unsplash.
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The Bull Case, the Bear Case, and What to Actually Do
Quick answer:
All-time highs are a surprisingly normal feature of a rising market: the S&P 500 sets one roughly 18 times each year, and historically they’ve been no worse an entry point for investors than any random day.
At the same time, the market does look stretched and very concentrated right now. But if you’re on the accumulation phase of Financial Independence, the likely answer is not to stop your investment contributions or to try and time a stock market exit and re-entry. Instead, it helps to shift your focus towards keeping your long-term return assumptions conservative and make sure your asset allocation fits your personal risk tolerance. The calculus is different if you’re close to retirement, though: that’s a sequence-of-returns problem we dig into in A Lost Decade for Stocks?
Investing at All-Time Highs: What the Data Says for Accumulators
There’s a particular kind of unease that creeps in when the market keeps setting new records. It certainly doesn’t help when many of the headline stories in finance are asking the same question: are we at the top and is everything about to come crumbling down?
It’s frustrating, because you feel like you’ve done everything right: you’ve locked in your savings rate and automated your investing into low cost, internationally diversified index funds, and you’ve made peace, at least in theory, with the stock market’s inherent volatility. You remind yourself again and again of Morgan Housel’s insight in The Psychology of Money, something along the lines that volatility is the price we pay as investors for our returns.
And yet, every time you read another story or article on stretched market valuations, you can’t help but wonder whether they’re right and you’re overpaying for your investments.
Today’s article is an attempt to answer these questions by looking at the evidence. We’ll focus on the perspective that is most useful for those folks still in the accumulation side of Financial Independence (FI). In other words, those deciding what to do with their next contribution while some of the news headlines talk of a stock market bubble.
Let’s start out by giving some context, and then examine calmly both the bear and the bull arguments.
Why “All-Time High” Feels Like a Warning (and Why 2026 Feels Worse)
It’s certainly normal to feel discomfort. Loss aversion means the imagined pain of buying just before a 30% drop feels far worse than the completely symmetric regret of sitting on the sidelines and missing out on a 30% rise. Partly as a result of this bias, a “record high” is filed away in our brain as a potential “danger” to manage.
It doesn’t help that the financial-news machine amplifies this very feeling, something we’ve covered before when discussing the need for an information diet. They do this because a steady drip of alarm is excellent at harvesting our attention and their business model, not necessarily because they are helping you decide on what’s best for your portfolio.
In this case, though, it is true that some of the facts are troubling. Market concentration is at levels not seen in modern history: the so-called “Magnificent Seven” represent roughly a third of the S&P 500, while the top ten make up around 40% of the index.
The Shiller CAPE ratio, a commonly used gauge for whether stocks are under- or over-valued, is near 40, a level only seen before the dot-com peak. There are indeed parallels to the late 1990s. And the Fed has just raised interest rates for the first time since 2023, perhaps an echo of the tightening that ended the last tech boom.
But the important question for a retail investor accumulator, though, isn’t whether things look overheated—they do—but what to actually do about it. Before going into it, though, let’s examine first the bear and bull cases.
The bear case deserves a serious look: record concentration, circular AI financing, and stretched valuations are indeed real clouds on the horizon. Photo by Nikolay Hristov on Unsplash.
The Bear Case
Many arguments for a bear case merit our full attention, so lets examine them one by one.
First, concentration and circular financing. As mentioned, only a handful of companies are driving the whole index, and the money flowing through the AI build-out increasingly loops around the same players. For example, consider the cycle where chipmakers are investing in model labs, model labs committing to cloud providers, and cloud providers buying chips.
The biggest AI and cloud companies are spending so heavily on data centres that they’re expected to spend much more cash than they bring in, and are increasingly borrowing to cover the gap. When a handful of similar, cash-hungry firms that tend to rise and fall together make up a third of the index, a stumble at any one of them could drag down the whole market (and everyone’s portfolio).
Second, a business-model threat from cheap, open models. If a free model from China can already do 80–90%+ of what a premium frontier model does, why keep paying up for a marginal edge in quality? To hold onto customers, the premium players would have to cut prices, and the pricing power that justifies their sky-high valuations would go with it. That kind of race to the bottom could be wonderful for consumers but brutal for today’s over-valued AI leaders. It’s easy to picture a world where AI genuinely transforms the global economy and several of today’s Magnificent Seven still fall hard.
Third, the adoption gap. Current valuations price in near-universal and immediate AI transformation, but reported adoption by enterprises is much slower. Think back to the dot-com era: the internet did change the world, and yet the crash still wiped out companies that were priced for a future that arrived too slowly to save them.
And then consider a fourth, softer risk that’s easy to dismiss: public backlash. It’s no secret that there is a growing unease about AI, including lack of regulation fears, job displacement, or fights over data center locations and the resources they consume. There is a sense that the people building this are out of touch with those who may have to bear the shorter-term consequences. Perhaps there are critical leaps for humanity down the road, but many people feel they will bear all the risks and costs in the short term.
While it’s harder to quantify this sentiment, it does potentially shape politics, regulation, and, eventually, what some of these companies can or can’t do.
The Bull Case
Turning to the optimists now, there are good arguments for a bull case too.
Let’s start out with one of the largest differences we are experiencing now compared to the early 2000s: the earnings are actually here. Unlike the flimsy or nonexistent business models of the dot-com bubble, today’s AI leaders are genuinely profitable. In 2024, the Magnificent Seven grew earnings around 37% versus under 5% for the rest of the S&P 500.
Why does that matter? A price-to-earnings (P/E) ratio is just what the name suggests: the price you pay per unit of earnings. A high P/E only means “expensive” if the earnings don’t grow into it. The market’s forward P/E, another valuation gauge, has actually fallen from about 22x earlier this year to roughly 19x, now near its own five-year average. And that wasn’t because prices dropped, but because earnings rose to meet them.
The dot-com peak traded above 50x on far weaker profits. Many upbeat analysts argue that we’re early-to-mid cycle, not at the final blow-off, and that we are currently seeing cash-rich, profitable businesses, not the logo-and-a-storyline companies of 2000.
Next is the fear about interest rates being exaggerated. Through 2020 and 2021, interest rates were near zero. When the Fed pushed them up sharply in 2022, stocks did have a rough year (the S&P fell about 18%). But across 2023, 2024, and 2025 the market climbed strongly even with rates still high. So, the argument would go that a hike or two isn’t a death sentence for stocks, especially if the spending driving today’s AI earnings doesn’t depend much on cheap borrowing.
Then comes the argument that our own intuition needs recalibrating: all-time highs are a fairly normal event. The S&P closes at a record on about 7% of all trading days—that’s over 17 times per year. Think how often “surely we’re at the top” must have felt obvious during the 50 record closes of 2024, and how costly exiting the market would have been.
Another counter-intuitive fact that can help reframe some of the all-time-high anxiety: buying at all-time highs has historically been no worse than buying on a random day. Using J.P. Morgan’s data back to 1988, average returns from record highs versus any given day run about 14% vs 12% after one year, 46% vs 41% at three, and 82% vs 76% at five. The instinct to stop buying at highs is simply not supported by the data.
The bull case: unlike the dot-com era, today’s leaders are backed by real, growing earnings, not just a story and a logo. Photo by Nguyễn Đức on Unsplash.
So, What Should an Accumulator Actually Do?
So, where does this leave us? Both cases genuinely have merit: the bears are right that the market looks stretched and concentrated, and the bulls are right that new highs are ordinary and that earnings this time are different than in the 2000s.
The historical evidence points to one uncomfortable conclusion: trying to time the market is a loser’s game. Remember that to come out ahead, you’d have to be right twice—about when to exit and about when to get back in—without leaving money on the table while you wait on the sidelines.
The practical answer, then, is simpler than the bull-versus-bear debate. It comes down to three habits rather than needing any forecast to be right.
First, keep buying. If you’re still in the accumulation phase, the next contribution should continue on schedule. Selling to “wait for clarity” usually backfires: the market tends to turn before the headlines do, so by the time it feels safe to buy again, much of the recovery has already taken place.
Second, adjust your expectations, not your behaviour. A richly valued market is a reason to be humble about returns, not to change what you do. Don’t extrapolate the last decade’s ~14% into your plan. Instead, pick a conservative long-run figure in your FI Calculator and leave it there.
Third, diversify on purpose, never in a panic. If you hold a global or US index fund, you already own a fifth to a third of your equity in the Magnificent Seven by design, so selling out now is just the market-timing bet you were trying to avoid. That said, concentration is a genuine long-term risk: as I argued in A Lost Decade for Stocks?, betting everything on one country’s biggest companies is what made the 2000s a lost decade for the S&P 500, while globally diversified portfolios came through far stronger. Broadening into international, small-cap, and value exposure is sensible as long as it’s a standing policy, not a reaction to this week’s headlines. A simple test tells the two apart: would you still want that allocation if the Magnificent Seven kept winning for another three years and you had to watch your diversified portfolio lag behind? If yes, it’s a policy worth holding. If its only appeal is that a crash feels overdue, it’s more like a timing bet in disguise.
If stretched valuations and the bubble worries are genuinely keeping you up at night, that’s usually a signal about your risk tolerance more than about the market. It’s not pointing you towards the buy/sell buttons but to re-examine your own asset allocation: how much you hold in stocks versus bonds and cash? The lucky part may be that you’re noticing it now, with the market relatively calm and high, so you can shift to a mix you’d be comfortable holding through a crash from a position of strength, rather than capitulating at the bottom later.
Either way, how much a downturn matters depends on your FI timeline: a decade or two from FI, a downturn is almost a gift. In contrast, for those close to living off their portfolio, it’s exactly when sequence-of-returns risk bites. We address this case in more detail in our recent article “A Lost Decade for Stocks?”
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🌿 Thanks for reading The Good Life Journey. I share weekly insights on personal finance, financial independence (FIRE), and long-term investing — with work, health, and philosophy explored through the FI lens.
Disclaimer: I am not a financial adviser, and this content is for informational and educational purposes only. Please consult a qualified financial adviser for personalized advice tailored to your situation.
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About the author:
Written by David, a former academic scientist with a PhD and over a decade of experience in data analysis, modeling, and market-based financial systems, including work related to carbon markets. I apply a research-driven, evidence-based approach to personal finance and FIRE, focusing on long-term investing, retirement planning, and financial decision-making under uncertainty.
This site documents my own journey toward financial independence, with related topics like work, health, and philosophy explored through a financial independence lens, as they influence saving, investing, and retirement planning decisions.
Frequently Asked Questions (FAQs)
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Historically, no. The S&P 500 sets new highs frequently (about 18 times a year), and investing at record highs has produced forward returns at least as good as investing on an average day over the following one, three and five years.
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Roughly one in every 15–19 trading days, or about 7% of the time—an average of around 18 record closes per year. Records are a routine feature of a rising market.
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Waiting is itself a bet, and usually a losing one. The market's best days cluster inside and immediately after its worst stretches, so investors who exit to "wait" tend to miss the recovery. Time in the market has consistently beaten timing it.
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There are real reasons for caution—historic concentration, circular financing, and stretched valuations—but also a genuine bull case, since AI-linked earnings are actually growing 30–40% and the forward P/E (~19.5x) is far below dot-com extremes. Reasonable people disagree; the point is that you don't need to resolve the debate to know what to do as an accumulator.
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No. If anything, an expensive market is a reason to keep your return expectations conservative, not to change your behaviour. Automated, regular investing removes the emotion that leads people to buy high and sell low.
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A high CAPE has historically signalled somewhat lower long-run returns, but it is a poor timing tool, and valuations can stay elevated for years. The sensible response is to plan for more modest returns, not to exit the market.
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Yes. The closer you are to living off your portfolio, the more a downturn at the start of withdrawals matters, due to sequence-of-returns risk (SORR). That's where a bond tent, spending flexibility, and a conservative withdrawal rate belong—see our guide to Safe Withdrawal Rates.
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