Stock market bears got it wrong, yet again

​​​The familiar pattern repeats itself

​Stock market bears have found themselves on the wrong side of the trade once again. The latest chapter unfolded as Asian markets hit record highs and optimism over a US-China trade deal swept through global equities.

​To be fair, the concerns weren't entirely without merit. Trade tensions were real, inflation had proven sticky, and valuations looked stretched in parts of the market. But as so often happens, the focus on potential problems obscured the likelihood of constructive outcomes.

​The Nikkei 225's breakthrough above 50,000 demonstrated that whilst bears were constructing elaborate cases for caution, markets were pricing in gradual improvement rather than catastrophe. What makes this episode noteworthy is the speed of the sentiment shift once positive news emerged.

​Reports of progress between US and Chinese officials triggered a substantial rally, suggesting the market had been coiled for good news rather than braced for disaster.

​Friday's inflation data undermined the bearish thesis

​Friday's US consumer price index release delivered another setback to those betting on economic weakness. The data came in softer than expected, supporting the case for Federal Reserve (Fed) rate cuts and contradicting predictions of persistent inflation.

​The trajectory of inflation continues to confound those who insisted a soft landing was impossible. Prices are cooling without the severe economic downturn many argued was inevitable. It's worth noting this doesn't happen by accident.

​The bond market's response was telling. Treasury yields adjusted lower whilst equities rallied, reflecting growing confidence in the Fed's navigation of this cycle. It's the sort of market action that occurs when fears prove overdone.

​Bears had argued inflation would remain stubbornly high, forcing prolonged tight policy. That thesis looks increasingly shaky as each data release fails to support it.

​Earnings season delivers positive surprises

​Corporate earnings are providing another reality check to pessimistic forecasts. The technology giants reporting this week demonstrate that strong business fundamentals can trump fearful speculation.

​Revenue growth and profit margins are holding up considerably better than many anticipated. Companies have adapted to higher interest rates more effectively than given credit for, managing costs whilst investing in growth opportunities like artificial intelligence (AI).

​Share investing opportunities emerged precisely when bearish voices were most vocal. Those who maintained exposure despite the warnings have been rewarded, though timing is always clearer in hindsight.

​The gap between pessimistic forecasts and actual results has been notable. Whilst earnings can disappoint in future quarters, right now the data supports a more constructive view than bears were advocating.

​Trade deal progress suggests pragmatism prevails

​The framework agreement between US and Chinese officials highlights how worst-case geopolitical scenarios often fail to materialise. Yes, tensions were real and concerns justified. But markets demonstrated their usual ability to look past short-term noise.

​This episode illustrates a recurring theme. Problems that appear intractable often get resolved through negotiation. It's not that bears were foolish to worry – they underestimated the incentives both sides had to find accommodation.

​The potential for constructive dialogue existed throughout, even when pessimists were mapping out escalation scenarios. Diplomacy tends to work more often than market commentary suggests.

​The cost of excessive caution

​There's an important distinction between prudent risk management and reflexive pessimism. The former involves sensible position sizing and diversification. The latter means missing rallies whilst waiting for crashes that may not arrive when expected.

​Being cautious has its place, but wholesale avoidance of equity exposure based on elaborate bearish narratives has proven costly over time. The opportunity cost of sitting out rallies compounds over the years.

​Missing even a handful of the market's best days can significantly impair long-term returns. Yet the temptation to wait for better entry points often results in sitting on the sidelines indefinitely.

​Historical perspective matters

​Looking back over recent years reveals a consistent pattern. Bears predicted severe consequences from Brexit, the pandemic recovery, inflation spikes and interest rate rises. Markets navigated all these challenges, though not without volatility.

​The S&P 500 has delivered positive returns in roughly three quarters of all years historically. Yet every year brings fresh predictions of imminent trouble. To be clear, corrections do happen and bears will eventually be proven right about something.

​This doesn't invalidate risk awareness. Markets experience genuine downturns and some caution is warranted. But using perpetual pessimism as an investment strategy has a poor track record when measured over complete cycles.

​Corporate resilience exceeded expectations

​One impressive aspect of this cycle has been how effectively companies adapted to challenging conditions. Businesses navigated supply chain disruptions, absorbed higher input costs and adjusted to changed working patterns more successfully than predicted.

​Management teams demonstrated flexibility through restructuring operations, investing in automation and finding efficiencies that maintained profitability. This adaptability undermined predictions of widespread profit collapse.

​It's fair to say not all companies managed equally well. But broadly speaking, corporate earnings have held up better than bearish forecasts suggested, even with margin pressure in certain sectors.

​Technical picture supports the constructive view

​From a technical perspective, recent price action reinforces the fundamental argument. Major indices have been carving out higher highs and higher lows, the classic pattern of an uptrend that remains intact.

​Breadth indicators have generally been supportive, with a healthy percentage of stocks participating in rallies. This suggests moves aren't just driven by a narrow group of mega-cap names.

​The 200-day simple moving averages (SMAs) continue to slope upwards for most major indices. Bears would need to see these key technical levels breached convincingly to validate their case.