Everyone hates this rally - and that may be why it keeps going

Record highs meet widespread market scepticism

​The S&P 500 continues hitting fresh records, yet investor sentiment remains deeply pessimistic about the rally's sustainability. This disconnect between price action and market psychology has become one of the most striking features of the current bull market phase.

​The rally has been notably narrow, dominated by mega-cap technology stocks and driven primarily by artificial intelligence (AI) optimism. Broader market participation has lagged significantly, with many sectors and smaller companies failing to keep pace with the headline indices.

​Valuations appear stretched across multiple metrics, while economic data continues to paint a mixed picture of growth momentum. Corporate earnings, though holding up reasonably well, show signs of strain in certain sectors as companies navigate challenging operating conditions.

​Geopolitical uncertainty, particularly surrounding trade policy and potential tariff implementations, adds another layer of investor discomfort. These concerns have left many fund managers positioned defensively, having missed early gains and now facing the dilemma of chasing performance in a market they fundamentally distrust.

​Scepticism becomes the rally's unlikely fuel

​Paradoxically, this widespread scepticism may be precisely what sustains the market's advance. Under-positioned institutional investors create a dynamic where any meaningful pullback is quickly met with buying interest from those seeking to reduce their underweight positions.

​Momentum-driven flows continue to support the market structure, with systematic strategies and trend-following algorithms reinforcing upward price movements. This technical support often proves more durable than fundamental concerns suggest, particularly when combined with defensive positioning.

​The absence of genuine market exuberance represents a classic "wall of worry" setup that has historically supported extended bull markets. When investors remain cautious and sceptical, it often indicates that speculative excess has not yet developed to dangerous levels.

​Earnings performance across major companies continues to provide fundamental support for higher valuations. While growth rates may be moderating, absolute profit levels remain robust enough to justify current share prices in many sectors.

​Reflationary outlook emerges for 2026

​Market attention is increasingly shifting beyond near-term uncertainties towards a more constructive reflationary scenario developing for 2026. The previous narrative of slowing growth combined with persistent inflation is now widely viewed as already reflected in current asset prices.

​Fresh fiscal stimulus measures, including potential infrastructure spending packages and permanent bonus depreciation policies, could drive a significant rebound in capital expenditure. These policy changes would likely boost corporate investment and productivity growth across multiple sectors.

​Renewed research and development expensing rules may particularly benefit technology and pharmaceutical companies, providing additional support for innovation-focused sectors. Such changes could enhance the long-term earnings growth profile of companies heavily invested in R&D activities.

​Federal Reserve (Fed) policy is expected to remain accommodative, with potential for an even more dovish stance under future leadership changes. This monetary policy backdrop should continue supporting risk asset valuations through lower discount rates and abundant liquidity.

​Financial deregulation provides additional tailwinds

​Potential changes to banking regulations, particularly modifications to the supplementary leverage ratio for systemically important banks, could unlock substantial credit capacity. Excluding Treasury securities from these calculations might free up over £150 billion equivalent in lending capacity.

​Such regulatory adjustments would likely benefit both the banking sector directly and broader financial markets through increased credit availability. Enhanced lending capacity typically supports economic growth and risk asset performance across multiple sectors.

​Financial sector deregulation often creates positive feedback loops, where improved bank profitability leads to increased lending, which in turn supports economic activity and further improves credit conditions. This dynamic could provide sustained support for equity markets.

​Inflation dynamics suggest transitory tariff impact

​Recent inflation data shows tariff impacts beginning to appear in goods prices, with core goods consumer price inflation excluding transportation rising 0.55% in recent months. This represents the largest monthly gain in three years, highlighting the immediate effect of trade policy changes.

​However, services inflation continues to moderate, while wage growth in the 3.5-4.0% range appears consistent with overall inflation targeting of 2-2.5%. This balance suggests that tariff-driven price increases may not trigger broader inflationary spirals.

​Rent inflation has shown meaningful moderation, with new lease data indicating further disinflation potential ahead. Housing costs represent a significant component of overall inflation measures, so continued moderation in this area supports the transitory tariff impact thesis.

​Market-based inflation expectations, as measured by inflation swaps, currently imply consumer price inflation rising to 3.5% over the next twelve months before falling back towards 2.5%. Long-run expectations remain anchored near the Federal Reserve's 2% target, suggesting inflation concerns may be overblown.

​Contrarian positioning supports durability

​The combination of improving growth expectations, fading inflation fears, and cautious institutional positioning creates a potentially durable market environment. This mix has historically proven more sustainable than purely sentiment-driven rallies that rely on widespread optimism.

​Under-positioned fund managers face ongoing pressure to increase equity allocations, providing a steady source of buying interest. This dynamic often persists longer than fundamental analysts expect, as career risk considerations force gradual position adjustments rather than dramatic shifts.

​The lack of retail investor exuberance, combined with institutional scepticism, suggests that speculative excess remains limited. Market bubbles typically require widespread participation and optimism that clearly has not yet developed in the current environment.