Headlines warning about “stretched” valuations and “bubble‑like” price action—especially in US technology—naturally make investors nervous. High valuations, however, are not a timing tool for getting out of markets. They mainly reflect expectations: investors are willing to pay more for each dollar of earnings when they believe those earnings are durable, resilient, and likely to grow faster than average.
Today’s market leaders, often grouped as the “Magnificent 7,” span software, semiconductors, hardware, cloud infrastructure, and AI‑driven technologies. Many generate substantial free cash flow, maintain strong balance sheets, sell business‑critical products on recurring contracts, and sit at the centre of long, multi‑year trends like AI, automation, and digital transformation. In combination, those characteristics can support elevated valuations longer than many expect.
It also helps to remember that a single valuation number is an average across a diverse group. “Tech” now covers profitable chipmakers, cloud infrastructure providers, enterprise software platforms, and device ecosystems—business models with different cycles and margins. Within that mix, some companies trade at premium multiples because their earnings compound rapidly, while others are priced more modestly. This dispersion matters. When profits rise strongly, even a significant compression in valuation does not have to derail returns. Multiples don’t need to expand continuously if earnings keep doing the work.
Another support is that many US equity leaders benefit from self‑reinforcing ecosystems. The largest platforms enjoy advantages in distribution, data, developer communities, and access to capital that can widen competitive “moats” over time. They can fund innovation from internal cash flows rather than relying on uncertain external financing, and they have global revenue bases, so growth does not depend on any single region or country. None of this eliminates risk, but it raises the bar for the kind of shock required to trigger a deep, lasting de‑rating across the group.
Interest rates matter for valuations because they are used to discount future profits back to the present. Markets have spent the last three years adjusting to higher market rates, and companies have adapted by improving pricing, efficiency, and capital allocation. Moreover, in a recent dovish pivot, the US central bank has guided the market to anticipate several more rate cuts as it responds to weakness in the labour markets. Even so, the more important driver from here is likely to be the path of earnings and free cash flow, which, as we have seen, remains encouraging.
Volatility is part and parcel of earning equity returns, particularly in the high beta tech sector. Pullbacks of 5% - 10% occur frequently during a market cycle, including healthy bull markets. Larger declines typically require a deterioration in fundamentals - such as a sharp contraction in economic activity that forces earnings downgrades and tightens credit conditions, a policy mistake that slows money growth, or a significant rise in bond yields if investors question the sustainability of public finances. Outside of those conditions, turbulence around earnings seasons, regulatory headlines, or geopolitics is common but often not trend threatening. Elsewhere, we would highlight the that increasingly high level of concentration in the US stock market is also a risk worth monitoring as a small number of mega‑caps have driven a large share of index returns, and the overall market can move abruptly if optimism on the growth potential of these companies wanes.
However, with large cap US equities valued at roughly a 50% valuation premium to the rest of the world it is nonetheless prudent to look for some geographical and sectoral diversification away from technology heavy US exposure. Eurozone equities, with Germany centre stage, are likely to benefit further from the commitment of over €1 trillion towards defence and infrastructure, alongside more flexible EU deficit rules. This policy mix should provide a further boost to the more cyclically sensitive mid cap stocks, and we expect it to be rolled out progressively as we head into 2026. Elsewhere, we would also expect UK equities to perform relatively well, with the valuation discount to the US at extreme levels, and its high exposure to consumer staples, health and commodities a good hedge against inflation and interest rate volatility and geopolitical uncertainty.
Favourable growth differentials with the developed world and a weaker US dollar should be positive for Emerging Market Asia; this environment should also allow for additional (market friendly) EM monetary policy easing. Japanese equities continue to have merit on the back of a “good rise” in inflation which aligns with improving consumption growth and moderate monetary policy normalisation. Elsewhere, we note the tailwind from reforms to boost capital efficiency and shareholder returns and there has been a surge in share buybacks, asset disposals and dividend increases. In addition, for the first time in three decades, household savings are shifting towards equities away from cash and bonds.
Finally, as the world moves from globalisation towards a “bipolar” world order, dominated by the US and China, rising national capitalism and reshoring will support companies which derive a relatively high amount of their revenue from domestic operations.
Given the foregoing (and notwithstanding the risks we have discussed), it still feels appropriate to strike a note of cautious optimism. Elevated valuations in US technology primarily reflect expectations of durable growth from businesses with unique assets in a world that is still digitising. However, holding a significant weight in regionally diversified equity exposure alongside the large cap US stocks remains a prudent strategy to offset the concentration risk in the US market and to gain access to a broader range of investment themes and drivers of returns.
Jon Cunliffe
Head of Investment Office, JM Finn
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
