Why is the Stock Market Going Up?

The most common question we are hearing right now from clients regarding their investments is “how is this happening?” Despite engaging in a war in the Middle East, historically high oil prices, and low levels of consumer confidence and investor sentiment, portfolios have continued to grow and volatility remains subdued. And all this is coming on the heels of three years of extraordinary returns. It seems everyone is anticipating a crash with the next big headline. So why hasn’t the crash happened?

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What investors tend to forget is the stock market does not care how you feel nor does it pay much attention to events that tend to be short-lived.  With Wall Street, everything eventually comes back to a basic question: how much money are companies making? And right now, companies are making a lot of money, so investors are willing to pay higher prices for a piece of those profits. In the short-term, stock prices fluctuate for a variety of reasons, many of which no one can explain. But, at the end of the day and over the long term, a stock's price depends on two things: how much money a company is making and how much an investor is willing to pay for each $1 of that.

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The U.S. consumer accounts for about 70% of gross domestic product (GDP), making it the primary driver of the American economy. As the main engine of economic growth, this high level of consumption includes spending on services and goods.  And right now, people are spending!  Anecdotally, restaurants are full, people are traveling, and Amazon trucks are driving past (and too often stopping at) our homes several times a day.

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Corporate America backs this up. As companies begin to release first quarter earnings, many are beating expectations.  Bank of America's chief executive officer, Brian Moynihan, said recently that “we saw healthy client activity, including solid consumer spending and stable asset quality, indicating a resilient American economy.”  Delta Air Lines said earlier this month that it's seeing strong demand from people flying both for business and for vacations. PepsiCo last week stuck by its forecast for profit over 2026, which it initially gave before the Iran war began, and CEO Ramon Laguarta said he's encouraged by how resilient its international business has been.

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Another factor in the positive returns for our client’s portfolios has been the diversification among multiple indices.  Often when investors think of “index investing”, they are just considering the S&P 500.  However, index investing should be much broader than simply investing in the U.S. stock market.  Fortunately, index funds are available for many other markets as well.  The low cost, low turnover, and transparency of index funds work just as well for international stocks, U.S. small caps, and alternatives to name a few. Many of these indices have continued to outperform the U.S. large cap market in 2026, just as they did in 2025.

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Of course, the positive returns we’ve seen over the past few years and into the first part of 2026 won’t last forever.  Bear markets are inevitable, but thinking you can pick the right time to get out (and subsequently get back in) is a fool’s errand, especially when these decisions are based on geopolitical events, sentiment, or “gut feelings”.  For both bull and bear markets, John Maynard Keynes' famous quote, "Markets can remain irrational longer than you can remain solvent", emphasizes the unpredictable nature of financial markets and the risks of betting against them, even when you believe they are mispriced or irrational.

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