With 2025 well in the rearview mirror already, it’s worth spending less time on what just happened and more time on what actually matters going forward.
Yes, markets are near all-time highs. And yes, that tends to make people uncomfortable. But the more important question isn’t where markets have been — it’s how they tend to behave from here.
Investing at all-time highs is not a red flag.
It’s a feature of long-term markets, not a flaw. One of the better pieces I’ve seen recently walks through this clearly: markets spend a meaningful amount of time at or near highs, and future returns after those highs are far better than intuition suggests.
Or said another way: if you wait for the market to “feel safe,” you usually end up buying later — and higher.
The market doesn’t ring a bell at the top — but it rings one constantly for people waiting on the sidelines.
Valuations in 2026: a headwind, not a brick wall
One reality heading into 2026 is that valuations are no longer cheap. If you look at forward P/E ratios in the JPM Guide to the Markets, we’re clearly above long-term averages.
That doesn’t mean poor returns. It means different returns.
Source: J.P. Morgan Asset Management, Guide to the Markets
When valuations are elevated, returns rely less on multiple expansion and more on fundamentals — earnings growth, dividends, and time. Historically, starting valuation affects the range of outcomes, not the direction. Expensive markets can still go higher; they just do it with more volatility and less forgiveness.
That’s not a reason to panic. It’s a reason to calibrate expectations.
And it’s also worth acknowledging that today’s market isn’t a perfect comparison to prior decades. Many of the largest companies today — particularly in technology — are far more profitable, capital-efficient, and scalable than the companies that dominated past cycles.
Software, platforms, and global distribution allow earnings to grow without the same capital intensity that existed decades ago. That doesn’t eliminate valuation risk, but it does help explain why higher multiples can persist longer than history alone might suggest.
The Federal Reserve: more drama, same job
It wouldn’t be a market outlook without a little Fed theater.
Recently, we’ve seen renewed headlines around Jerome Powell — investigations, political pressure, and louder calls for rate cuts. Whether that pressure sticks or not, it’s a reminder that the Fed doesn’t operate in a vacuum, especially heading into a midterm year.
That said, the Fed’s actual job hasn’t changed.
Inflation has cooled, growth is uneven, and policymakers have little incentive to move aggressively in either direction. The most likely outcome for 2026 isn’t dramatic easing or renewed tightening — it’s waiting. Perhaps some cuts later this year if leadership changes — we’ll see.
Regardless, markets tend to struggle when investors assume the Fed must either “save” the economy or break it. More often, the Fed just sits there — and markets grind higher while everyone argues on TV.
Noise travels faster than policy.
Where returns are likely to come from in 2026
One of the clearest messages from the year-in-charts data is that leadership has started to broaden. After several years dominated by a narrow group of mega-cap winners, returns are quietly becoming more distributed.
That doesn’t mean abandoning growth or technology. It means expecting contributions from more places:
- Companies with durable earnings and reasonable valuations
- Dividends and free-cash-flow generation
- International and non-U.S. exposure
- Bonds finally doing their job again
If you look at long-term asset class return charts, this is exactly the kind of environment where diversification stops feeling boring and starts being useful again.
Source: J.P. Morgan Asset Management, Guide to the Markets
Markets don’t usually fall apart when leadership rotates. They digest gains and reallocate them.
The real risk in 2026
The biggest risk this year isn’t recession, inflation, valuations, or the Fed.
It’s behavior.
Chasing what just worked. Panicking during normal pullbacks. Sitting in cash waiting for certainty that never arrives.
If 2026 ends up being a “grind higher with interruptions” kind of year — and history suggests that’s a very real possibility — impatience will be far more expensive than any macro surprise.
This post is an excerpt from a private client newsletter on 1/12/2026.