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After a strong first half of the year, many investors are feeling a familiar tension. On one hand, diversified portfolios have benefited from rising markets, continued enthusiasm around artificial intelligence, and strength in parts of the technology and semiconductor sectors. On the other hand, that same backdrop has raised understandable questions:
- Are valuations too high?
- Is the market too concentrated?
- Are investors getting carried away again?
- With cash still offering a reasonable return, is stepping aside to wait for a correction the better move?
That feeling is understandable. No one wants to invest right before a downturn. No one wants to look back and realize they ignored obvious warning signs. The problem is that market tops are usually only obvious in hindsight.
On a chart, a peak looks clean and easy to identify. In real time, it rarely feels that way. Expensive markets can become more expensive. Strong trends can continue longer than expected. A market that eventually declines may still rise meaningfully before the correction arrives. History offers some perspective here. Since 1926, the S&P 500 has returned 13.8% on average in the year following a new market high, with annualized returns near 10% over the following three and five years. New highs, in other words, have more often been a waypoint than a peak.
Source: Dimensional Fund Advisors. Returns based on the S&P 500 Total Returns Index.
There is no clear signal when the market has reached a top. Investors have to make decisions with incomplete information, mixed signals, and no guarantee that today's worry becomes tomorrow's decline.
This is what makes moving to cash so difficult. It requires being right twice. First, you have to know when to get out. Then, often under even more stressful conditions, you have to know when to get back in.
The second decision is usually harder than the first. When markets fall, the headlines do not suddenly become reassuring. A 10% decline can make investors wonder if a 20% decline is coming. A 20% decline can raise fears of something worse. By the time prices are lower, the emotional comfort of buying is often gone. The “better entry point” investors were waiting for may not feel better at all.
Even being right carries a cost. An investor may correctly identify that parts of the market are expensive, yet if the market continues higher for months or years before correcting, sitting in cash exacts a real price in the meantime. A bubble warning can prove accurate and still prove expensive if the wait costs an investor a long stretch of compounding.
None of this means valuations are irrelevant. Prices matter, and high valuations can lower future expected returns. That signal has limits, however. Valuations are much better at shaping long-term expectations than predicting short-term turning points. They are a useful planning input, not a reliable stopwatch.
So what should investors do instead?
The answer is usually less dramatic than moving entirely to cash. Rebalance when portfolios drift too far from target. Keep appropriate cash reserves for near-term spending needs. Stay diversified across asset classes, sectors, company sizes, and geographies. Make sure the level of risk still fits the financial plan. Use market declines, when they happen, as opportunities for tax-loss harvesting.
The goal is not to pretend markets are never expensive or that corrections will not happen. They will. The goal is to build a plan that does not require us to know exactly when they will happen.
Market tops are easy to spot after the fact. Successful investing requires a strategy built for the uncertainty we face before the fact.
Week in Review
- Federal Reserve officials voted unanimously to keep interest rates unchanged at a target range of 3.50%–3.75% following their June 17 meeting, marking the fourth consecutive meeting without a policy change. Alongside its decision, the Fed released its latest Summary of Economic Projections (SEP), including the closely watched "dot plot," which reflects individual FOMC members' expectations for the path of interest rates. The median 2026 projection now indicates a single 25-basis-point rate hike by year-end; a notable shift from the March forecast, which anticipated a 25-basis-point rate cut.
- Data released last Friday showed that May Core PCE, the Federal Reserve's preferred measure of inflation, which excludes food and energy prices, increased 0.3% month over month and 3.4% year over year, marking its highest annual reading since 2023. Headline PCE, which includes food and energy costs, rose 4.1% from a year earlier. The sharp increase in headline inflation was largely driven by higher energy prices stemming from the ongoing conflict with Iran, resulting in the highest annual PCE reading since April 2023.
- With Q1 earnings complete and all S&P 500 companies having reported results, FactSet released the final Q1 2026 earnings growth rate of 28.8%. Information Technology, Communication Services, and Materials were the sectors that contributed the most to Q1 Earnings, with year-over-year growth rates of 54.8%, 48.9%, and 42.5%, respectively. FactSet also released its initial estimate for Q2 2026 year-over-year earnings growth for the S&P 500 at 23.1%, which would mark the second consecutive quarter of earnings growth greater than 20% for the index.
Hot Reads
Markets
- Is an AI Jobs Apocalypse Coming? Three Economists Square Off (WSJ)
- Small-Cap Stocks Enjoy Their Best First Half in 35 Years, Here's What's Driving It (CNBC)
- Core Inflation Rate Hit 3.4% in May, Highest Since October 2023, Fed's Preferred Gauge Shows (CNBC)
Investing
- Don't Fight the Stock Market, Make It Work for You - The Informed Investor (YouTube)
- Worried About a Tech-Stock Bubble? Here's Where You Can Take Cover (Jason Zweig)
- Everything is Beating the S&P 500 This Year (Ben Carlson)
Other
- How the Electrical Grid is Being Rebuilt for AI - Bloomberg Originals (YouTube)
- Inside the Biggest Invasion in Human History - World War II with Tom Hanks (YouTube)
- Tiger Woods and Rory McIlroy: How to Hit Driver (YouTube)
Markets at a Glance
Fund Returns
Sector Returns
Factor Returns
Source: Morningstar Direct.
Source: Morningstar Direct.
Source: Treasury.gov
Source: Treasury.gov
Source: FRED Database & ICE Benchmark Administration Limited (IBA)
Source: FRED Database & ICE Benchmark Administration Limited (IBA)
Economic Calendar
Source: MarketWatch
- Competition, Achiever, Relator, Analytical, Ideation
Josh Jenkins, CFA
Chief Investment Officer, Principal
Josh Jenkins, Chief Investment Officer, began his career in 2010. With a background in investment analysis and portfolio management from his previous roles, he quickly advanced to his current leadership position. As a member of the Lutz Financial Board and Chair of the Investment Committee, he guides Lutz Financial’s investment strategy and helps to manage day-to-day operations.
Leading the investment team, Josh directs research initiatives, while overseeing asset allocation, fund selection, portfolio management, and trading. He authors the weekly Financial Market Update, providing clients with timely insights on market conditions and economic trends. Josh values the analytical nature of his work and the opportunity to collaborate with talented colleagues while continuously expanding his knowledge of the financial markets.
At Lutz, Josh exemplifies the firm’s commitment to maintaining discipline and helping clients navigate market uncertainties with confidence. While staying true to the systematic investment process, he works to keep clients' long-term financial goals at the center of his decision-making.
Josh lives in Omaha, NE. Outside the office, he likes to stay active, travel, and play golf.
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