This year of market buoyancy is making investors uneasy. It isn’t only because prices are rising—it’s because they often rise faster than conviction. When central bankers express discomfort, when seasoned macro thinkers warn of bubble dynamics, and when geopolitics increasingly weaponizes currencies and capital flows, investors feel the irresistible urge to respond.
But as Buffett reminds us, “market timing is a fool’s game,” and as Damodaran adds, “if you insist on playing it, at least play by rules rather than by emotion.”
Today’s conditions invite that reflection. Valuations are stretched, capital is concentrated in a narrow group of mega-cap winners, debt loads are burdensome, and the geopolitical environment has begun to resemble a financial chessboard rather than a cooperative market. Still, investment decisions must be made—not panicking or avoiding the noise, but by interpreting it correctly.
1. Powell’s Unease: “Fairly Highly Valued” Markets
When Jerome Powell recently described equities as “fairly highly valued,” he unintentionally coined an oxymoron that says more about the moment than about valuations. Markets can be fair or high—but not both—yet his phrasing captures the ambiguity many feel.
After wavering early in the year, markets surged back with surprising conviction. What looked like fragility in Q1 changed into strength by Q3, defying pessimistic forecasts. By the end of September 2025, the U.S. market—still more than half of global equity capitalization—had regained leadership.
And at the center of the surge stands the now-familiar “Magnificent Seven,” which collectively represent 30% of U.S. market capitalization and have contributed over half of total market-cap gains for three consecutive years. When a handful of companies carry the lion’s share of performance, investors cannot reasonably argue that the market is broadly priced using broad fundamentals.
Powell’s discomfort mirrors that of many analysts: prices make sense only if the future is as bright as investors implicitly assume. But as history reminds us, timing a reversion is the hardest task in investing.
2. Dalio’s Bubble Logic: Why Bubbles Don’t Pop When You Think
Ray Dalio frames bubbles differently: They don’t burst when investors collectively “realize” prices are too high; they burst when buyers run out of money and holders need liquidity.
In his words, “converting financial wealth into spendable money requires selling it.”
It is the selling pressure—not the intellectual recognition of overvaluation—that punctures a bubble.
Today’s conditions, he argues, include the classic ingredients:
- Excess promises relative to money in the system: Debt obligations exceed available cash, creating a mismatch that forces sales during stress.
- Governments that cannot borrow, tax, or cut spending enough: The U.S. and other democracies face structural deficits with increasingly limited policy space.
- Geopolitically cautious foreign creditors: Major reserve holders—most notably China—are trimming exposure to U.S. debt and reallocating toward gold, partly due to “weaponized” sanctions.
Together, these form an ecosystem where liquidity shortages, not valuation debates, are the real risk triggers.
3. Geopolitics: Economic Warfare Is the New Battlefield
Dalio extends the argument: military conflict is costly; financial conflict is cheap. That makes it increasingly attractive.
Recent history has shown how the leading power uses its currency and payment system as leverage—freezing Japanese assets before WWII, Russian reserves in 2022, and threatening similar moves elsewhere. Such actions inevitably make foreign holders of dollar-based assets wonder: Could it happen to us?
When a reserve currency becomes a geopolitical tool, two consequences follow:
- Credibility of the debtor erodes.
Investors demand less of the currency and the debt it supports. - Gold becomes a more attractive reserve asset.
Not because its yield is compelling, but because it cannot be frozen or devalued by decree.
Thus, geopolitical tensions weaken the dominant currency’s role and push global portfolios toward hard assets.
4. The Temptation to Time the Market — And the Proper Way to Do It
Most investors should not attempt market timing. History teaches that even when correct, investors tend to be early—and early may as well be wrong. Greenspan warned of “irrational exuberance” five years before the dot-com crash; those who sold at his warning underperformed those who held throughout.
But for those who insist, Damodaran proposes a disciplined three-step process:
- Choose a valuation signal: Could be PE ratios, price-to-book, cyclically adjusted earnings yields, or intrinsic measures like equity risk premiums.
- Establish objective thresholds: For example, reducing equity exposure if the market PE exceeds its long-term median by 25%.
- Pre-commit to a mechanical asset-allocation response; If stocks appear 25% overvalued, shift from 60/40 to 40/60; if undervalued, move to 80/20.
Even then, Damodaran emphasizes three unavoidable truths:
- Metrics are incomplete, and narratives behind deviations must be understood.
- Backtesting matters, not correlations.
- Markets stay mispriced longer than investors stay solvent.
There is no easy version of market timing.
5. Valuations: Rich Across Every Metric
PE ratios—trailing, forward, and cyclically adjusted—are all hovering near historical highs. Only the peak of the 2000 tech bubble surpasses today’s levels.
Implied equity risk premiums tell a similar story:
- Current ERP (Sept 2025): ~4.0%
- Post-2008 average: higher
- Dot-com bubble: ~2.0%
The bullish camp argues we are nowhere near the euphoria of 1999.
The cautious camp notes the ERP is thin relative to the post-GFC regime, implying limited compensation for equity risk.
Both are correct in their own way. But markets are clearly priced for optimism.
7. What To Do When Markets Look Expensive
Assuming markets are indeed overpriced, investors have five strategic options according to Damodaran, —ranked from cautious to aggressive:
- Do nothing– Maintain your long-term allocation and continue investing steadily. This approach has historically beaten most market timers.
- Accumulate cash defensively – No major changes to asset mix, but new contributions go into cash-like instruments.
- Adjust the asset allocation – Shift from equities toward bonds or alternatives. Accept higher taxes and transaction costs.
- Buy downside protection: Use index puts or short futures to hedge without altering the core portfolio.
- Make leveraged bets on decline
The most aggressive—and least advisable—strategy: shorting or concentrated derivative positions.
Three caveats apply to all strategies:
- Taxes increase with active reallocations.
- Transaction costs accumulate with frequent moves.
- Timing remains hazardous, even if you are fundamentally correct.
6. Investment Alternatives: What Else Is There?
Investors evaluating equities must compare them to available substitutes.
Value vs. Growth
Historically, low price-to-book equities outperform high-PB ones after adjusting for risk. Yet recent years have been dominated by high-multiple mega-caps, skewing performance toward growth.
U.S. vs. Global Equities
The S&P 500 has dramatically outperformed the MSCI World ex-U.S. Index.
This divergence presents both a concentration risk and a diversification opportunity into non US equities such as emerging markets.
New ETF Option: Vanguard Emerging Markets ex-China (VEXC)
Launched October 2025, VEXC offers a diversified exposure excluding China, reducing geopolitical and policy risk at low cost (0.07% expense ratio)
- Country weights:
- Taiwan: 33.6%
- India: 28.5%
- Brazil: 6.1%
- South Africa: 5.8%
- Saudi Arabia: 5.7%
- Mexico: 3.3%
For investors concerned about China’s structural and geopolitical challenges, VEXC could be a timely instrument. However, its highest weight is in Taiwanese stocks exposed to China-related risks.
Conclusion: Navigating 2026 with Clear Eyes
Valuations are elevated, liquidity risks are climbing, bubble dynamics are possible in certain securities, and geopolitical frictions increasingly involve currencies and reserves. Yet none of this automatically signals an imminent crash.
What it does signal is the need for clarity: clarity of objectives, of strategy, and of temperament.
As Howard Marks often writes, superior investing is not about predicting the future—it is about being prepared for it.
Our task is not to outguess the market but to build portfolios that remain resilient, flexible, and logically constructed, whatever the next year brings.
References Dalio, R. (2025, October 24). Sanctions, geopolitics, and gold. Bridgewater Associates. Dalio, R. (2025, November 20). The big dangers of big bubbles with big wealth gaps. Bridgewater Associates. Damodaran, A. (2025, October 6). A “fairly highly valued” market: A Fed chair opines on stocks, but should we listen? Musings on Markets. Vanguard. (2025). Vanguard Emerging Markets ex-China ETF (VEXC): Prospectus & holdings. Vanguard Group.
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