Are stock market record highs a warning sign?

U.S. equities have reached new highs this summer, with the S&P 500 closing at a record 7,798.99 on August 13 before finishing August 14 near that level at 7,785.76.¹  To many investors, such highs feel like warning signs—a signal that gains are spent and a correction is due. We would fade those concerns. Record highs alone are not a reason to step aside, particularly when the economy and earnings backdrop remain constructive. The fundamentals remain solid—although volatility could come from Federal Reserve policy decisions, valuation pressure, or a loss of momentum in the artificial intelligence (AI) narrative—which is not our base case.

Are all-time highs a reason to wait for a pullback?

The discomfort of investing in a record high is one of the most reliable, and most expensive, instincts in markets. It rests on the intuition that a high must be followed by a fall. The historical record says otherwise—and not by a trivial margin. Since 1920, investing in a day the S&P 500 closed at an all-time high produced average forward returns of roughly 9.9% over the following year, 36% over three years, and 63% over five years (Exhibit 1). Those results were not merely comparable to the returns earned investing on all other days—they were modestly better: about 10 basis points higher over one year, and roughly 420 basis points higher over both the three- and five-year horizons.²

A gap of that size compounding over multiyear periods is meaningful, not noise. The explanation is structural rather than lucky. In a market that rises over time, new highs are not an anomaly to be feared but a feature of the trend, and an index that compounds spends much of its life at or near a record. An investor waiting for the "all clear" that a new high seems to withhold is, often, waiting to be left behind.

Why is the market defying gravity?

The premise is worth pushing back on: The market is not defying gravity so much as reflecting the strength beneath it. The highs rest on fundamentals, not on momentum alone. 

• The clearest driver is earnings. The second-quarter reporting season was strong, with the majority of S&P 500 companies beating estimates, and full-year profits are expected to grow at a double-digit pace in both 2026 and 2027³ . Over time, prices follow earnings—and earnings have been climbing. 
• Beneath the profit picture, the real economy has proven more resilient than headlines about a hawkish Fed might suggest. Manufacturing activity⁴ expanded in July for a seventh consecutive month, with the ISM Manufacturing index reaching a four-year high, while the far larger services sector extended its own run to a 25th straight month of expansion.⁵
• The labor market is the softer spot in this picture, as July's report made plain: Nonfarm payrolls slipped by 23,000—a figure the Bureau of Labor Statistics characterized as little changed—and downward revisions left May and June a combined 103,000 lower than first reported. Even so, the unemployment rate held at a low of 4.1%, permanent job losses have not surged, and the pattern reads more like a low-hire, low-fire slowdown than the onset of genuine deterioration.⁶

Taken together—resilient earnings, expanding output, activity surveys at multiyear highs, and a labor market that is cooling without cracking—this is the profile of an economy still in the mid-phase of its cycle, not one on the verge of recession.

What could unsettle the rally?

The main risks are monetary policy, valuation sensitivity, and the possibility—not our base case—that AI enthusiasm fades:

• Rate uncertainty. The Fed held its benchmark rate at 3.5% to 3.75% in July, its fifth consecutive hold, but three members dissented in favor of a hike—an unusually hawkish split that keeps another increase on the table.⁷ 
• Sticky inflation. With inflation still running above target after the summer's energy spike, the Fed has reason to stay restrictive even as growth moderates.
•  A labor market pulling the other way. July's soft payrolls report strengthens the case for eventual cuts, leaving policy genuinely cross-pressured rather than on a clear path—and the Fed with a harder balance to strike.
• AI enthusiasm cools. Not our base case, but slower AI spending, weaker monetization evidence, or “good news sold” earnings reactions could unsettle the leadership behind the broader rally.
• Jackson Hole, Wyoming. Fed Chair Kevin Warsh's remarks on August 27–29⁸ are the market's best near-term opportunity for clarity on how the Fed weighs sticky inflation against a cooling labor market, and a likely source of volatility in either direction.

The point is to define the risk precisely. A hawkish Fed or AI air pocket could create volatility, but neither would automatically undermine the broader fundamentals case. Investors should be prepared for periods of market turbulence without interpreting short-term volatility as a shift in the underlying trend. 

How should advisors frame this for clients?

For clients holding cash, history argues against waiting for records to “clear”; averaging in can reduce the emotional hurdle without abandoning a rising market. For clients already invested, the focus should be on managing volatility through diversification and ballast, not avoiding equities because prices are high. The fundamentals behind these highs are real, and so are the risks—but record highs, by themselves, have rarely been a good reason to sell.