This quarter was another exceptionally strong period for equity markets. We have seen a broadening of market returns across asset class, which is a good sign. Global small caps and emerging markets are leading year-to-date. It wasn’t long ago all returns were concentrated in the United States (US). Under the surface we have seen both broad based strength and concentrated returns.
Investors remained focused on artificial intelligence (AI) and AI beneficiaries, which led much of the market's advance. The winners have been moving from mega-cap hyperscalers to other companies in the AI supply chain earning massive revenue from hyperscaler spending. In Canada, banks have been significant contributors to market performance.
Reason for caution around market highs?
As we pass the midpoint of 2026, some investors are asking a familiar question: should I be more cautious when markets are near record highs? The concern is understandable. Equity markets have recovered strongly, AI-related companies have driven much of the leadership, and inflation remains less predictable than it was before the pandemic. But market highs are not, by themselves, a signal that a downturn is imminent. They are a normal feature of long-term investing.
If the alternative to high markets is sitting on the sidelines, investors may do more harm than good. What is more important is to assess if you have the right overall allocation to equity or if this should be reduced for more bonds or alternative investments.
Market highs feel uncomfortable, but they are common
Investing near a market high can feel counterintuitive. The natural instinct is to wait for a better entry point, especially after a strong rally. That instinct is often driven by loss aversion: the discomfort of a potential decline feels more powerful than the benefit of participating in further gains.
History provides useful perspective. Markets spend a meaningful amount of time near prior highs because businesses grow, earnings compound, and economies expand over time. A market high can feel like a warning sign, but it is often simply a reflection of long-term growth.
That does not mean markets cannot decline from here. They can. But waiting for the “perfect” entry point can leave long-term capital sitting on the sidelines while markets continue to advance.
The risk is not one-sided
There are legitimate reasons to be more cautious. The AI trade has become a major driver of market returns, which means disappointment around AI spending, adoption or profitability could create volatility. Inflation also remains a risk. If inflation proves sticky, central banks may have less room to cut interest rates, which could put pressure on bond yields, equity valuations and economic growth.
But there are also risks in being too cautious. Corporate earnings remain very strong, and earnings expectations have continued to move higher. Policy also remains supportive, particularly through fiscal spending. Labour markets remain solid, consumers and businesses are still spending, and capital investment continues to be an important driver of US growth.
AI is part of that investment cycle. Even if AI-related stocks experience volatility, the physical buildout is still in the early stages. Large technology companies are spending heavily on chips, data centres, networking, power and infrastructure. That spending is already benefiting the companies supplying the buildout and is contributing to broader economic activity.
This is why the current environment is difficult to summarize as simply bullish or bearish. The downside risks are real, but so are the supports beneath the market.
Expectations matter more than the market level
The level of the market matters less than the expectations around it. Today, a meaningful portion of investor enthusiasm is tied to AI. The companies supplying the buildout are benefiting from real dollars being spent today. The bigger question is whether the companies funding this investment will ultimately earn attractive returns on the capital being deployed.
That distinction matters. Strong themes can remain powerful for years, but high expectations lower the margin for error. Markets can keep rising if earnings remain strong and investment continues, but they can also become more sensitive to any shift in the narrative.
Strong markets require portfolio discipline
At mid-year, the message is not to avoid markets because they are near highs. It is to remain thoughtful about how portfolios are built.
Strong earnings, fiscal spending, AI investment and resilient growth argue against becoming too defensive. At the same time, inflation uncertainty, concentrated leadership and elevated expectations argue against simply chasing what has already worked.
A well-constructed portfolio should participate in growth while remaining prepared for several possible outcomes. That means maintaining exposure to the themes driving markets today, while also ensuring portfolios are not dependent on one theme, one region or one interest-rate path.