With stock markets near record highs, why would an investor worry?

I have been bullish most of my career, and why not? With markets near record highs, every single dip has been a buying opportunity for investors with a long enough time frame. I am still bullish, and am not too concerned about a big market event. Things have been pretty good for stocks in the past few months. The V-shaped bounce after the March dip has been fast and furious. Many stocks have doubled in a couple of months. But, while still positive on the market outlook, we at 5i Research thought it might be best to highlight a few concerns that might be lurking in the background of the economy and markets. It doesn’t change our net positive viewpoint, but it is important to be realistic. Markets do not go up in a straight line and corrections can happen for any reason. Sometimes, corrections can also happen without any reason. Here are five points just to be aware of, in case you get a feeling of irrational exuberance watching markets hit new highs week after week.

Inflation is slowly creeping up

With the U.S. driving soaring markets, that country’s inflation numbers matter. April wholesale inflation, as measured by the producer price index, rose six per cent year over year in April, marking the highest reading since December 2022 and exceeding forecasts of 4.8 per cent. The monthly jump indicates intense, ongoing price pressure on producers to raise costs for consumers. For those with short memories, 2022 was a horrible year for the stock market, with the decline nearly fully attributable to rapidly-rising inflation, which caused central banks to raise interest rates sharply in order to curb inflationary pressures. Now, one month does not make a trend, but if we see consistently higher inflation over several months, investors could ease off on their recent buying spree, just in case.

Stock gains are highly concentrated in certain sectors

Many market experts are expressing concern about the lack of breadth in the market. Gains have been highly concentrated in technology (the S&P 500 sub-sector is up about 16 per cent, according to Bloomberg LP), materials (up about 14 per cent) and energy (up about 28 per cent). Many other sectors have been left in the dust this year, such as health care (down about six per cent). Historically, for a market rally to be strong and sustainable, it requires more sectors, and more stocks, to do well. Now, the strong sectors have legitimate reasons for their strength in 2026, but we would like to see the market rally broaden out a bit more.

Earnings growth is also highly concentrated

Investors are also getting concerned that earnings growth is too concentrated. S&P 500 earnings forecasts call for about 14 per cent growth this year, according to Bloomberg consensus data, but again, this growth is concentrated largely in the same sectors as noted above. This cycle there is also a very big outlier. Micron Inc., a memory manufacturer, is estimated to account for nearly half of the S&P 500’s expected 2026 earnings growth. When a single company can be so dominant in an index that currently holds 503 stocks, caution may be advised. Micron shares are up 693 per cent in the past year, so have obviously contributed to the market’s big gains as well.

We still have multiple wars ongoing

The Ukraine War, which was supposed to last a few days, is now in its fourth year. The Iran War, now several months old, doesn’t seem to have any defined end point. We have seen the price of oil rise 70 per cent, and had a subsequent impact on inflation and the energy sector, as noted in the points above. Wars, in addition to their direct economic impact, also have an impact on investors through negative sentiment and uncertainty. Valuation multiples, with some being viewed as high now, are not likely to increase much without some conclusion to the many worldwide conflicts now ongoing.