There is an old Yogi Berra line that feels useful in the current market environment:

“When you come to a fork in the road, take it.”

That may not be perfect investment advice, but it does describe the current equity market rather well.

There are two competing views today.

The first is that markets, particularly in the United States, have become expensive and increasingly concentrated. A relatively small number of very large companies have driven a meaningful portion of recent market returns. Valuations are not cheap…in fact, they are approaching expensive…and the enthusiasm around artificial intelligence, technology, and large-cap growth assumes a favourable future. We all know what can happen when we “assume”.

The second view is that the market’s strength is not simply speculation. Many of the companies leading the market are exceptional businesses. They have strong balance sheets, substantial cash flow, high margins, and real earnings growth. In that context, traditional valuation measures such as price-to-earnings ratios remain important, but they do not tell the entire story.

In our view, both perspectives can be correct.

The market can be expensive and still continue to rise. It can be concentrated and still be supported by real earnings. It can also be fundamentally strong while carrying more risk than usual.

As the old market line goes, “It does not matter until it matters, and then it really matters.” Concentration, valuation, and investor enthusiasm may not create an immediate problem. But when market leadership changes, those issues can matter quickly.

That is why we do not make all-or-nothing market calls.

For most clients, our approach has not been to step away from equities or add fixed income simply because markets have become more expensive. Instead, we like to build portfolios that recognize both sides of the current debate.

We want exposure to the areas of the market where earnings growth, innovation, and momentum remain strong. That can include mandates such as Assante Private Portfolios, Munro and some Fidelity holdings, where participation in global growth businesses remains an important part of the portfolio.

At the same time, we also want exposure to managers that are more selective, more valuation-conscious, and more willing to look different from the broad market index. EdgePoint Global and Cymbria are just two of many good examples of that approach. Their emphasis on owning understandable businesses at sensible prices provides a different perspective from simply following the largest or fastest-rising names in the market.

The point is not that one approach is right and the other is wrong. The point is that they think differently, own different types of businesses, and may respond differently when market conditions change.

That is invaluable in a period like this.

Momentum has shown considerable durability over long periods. It is not merely a short-lived trading phenomenon. Markets often reward companies with strong earnings revisions, improving fundamentals, and positive investor sentiment for longer than expected. Stepping aside entirely because markets “feel expensive” can therefore be costly.

At the same time, price still matters. A great company can become a disappointing investment if too much good news is already reflected in its share price. We do not want portfolios dependent on one theme, one sector, or a small handful of companies continuing to do all the work.

Our role is not to predict the precise moment when the market changes direction. That is nearly impossible without relying on blind luck, and usually not very productive either.

Our role is to make sure that our holdings are prepared for more than one outcome.

That means remaining invested where appropriate, maintaining diversification within equities, using multiple managers and investment styles, and making sure your portfolio continues to reflect your personal objectives, time horizon, liquidity needs, and tolerance for volatility.

If only the markets would put up a sign telling us which fork leads to “continued gains” and which one leads to “why did we own so much of that?” Until that happens, we want to participate in the opportunity that strong global businesses and innovation can create. We also want to avoid chasing what has already worked simply because it has worked recently.

Take care,
Chris