Historically high market valuations would normally argue for a more defensive stance. However, strong tailwinds from government spending, AI investment, and corporate earnings support staying invested with an emphasis on disciplined risk management and selective diversification into anti-dollar assets such as international equities and precious metals.
While 2025 proved to be a strong year across all CWM investment strategies, particularly the more aggressive and actively managed approaches, disciplined investors understand that strong recent performance does not eliminate future risk. Entering a new year, the task is not to celebrate past returns (a quick hurray for that!), but to reassess the landscape ahead: identifying emerging risks, understanding what has been driving markets, and determining where opportunities may still exist.
As always, the CWM investment team relies on market and economic data to evaluate the current environment. Our analytical framework incorporates a large dataset of economic and market variables that fall into five primary categories: valuation, economic fundamentals, investor behavior, interest-rate policy, and price momentum. Together, these measures help us understand not only where markets stand today, but how conditions are evolving beneath the surface.
At first glance, the current picture appears mixed. On one hand, equity valuations stand at extreme historical highs, a clear caution signal. On the other, several powerful forces continue to support economic growth and asset prices, including strong corporate earnings, easing Federal Reserve policy, large-scale government spending, and ongoing investment in artificial intelligence (AI) infrastructure. Taken together, the outlook remains constructive, but elevated valuations introduce unique risks and make selective, disciplined positioning more important than ever.
High Valuations and Volatility
If AI ultimately delivers the productivity gains many expect, today’s valuation levels may not look excessive in hindsight. In the present moment, however, virtually every widely used valuation metric suggests U.S. equities are expensive relative to historical norms. Elevated valuations matter because major market drawdowns most often begin when prices are already stretched.
Below is CWM’s preferred valuation measure, market capitalization relative to gross domestic product, followed by a summary of other commonly used metrics tracked by economists and portfolio managers.
Source: Quarterly Chartbook. (Q1 2026). Charles Schwab.
Valuations alone do not dictate investment decisions, but they do raise the probability of volatility and increase the importance of diversification and risk management.
The $13 Trillion Reason Markets Remain Supported
One reason markets have remained resilient despite high valuations is the extraordinary level of global government spending underway. In the United States, fiscal policy is already operating at levels typically seen during economic downturns. Federal deficit spending exceeding $13 trillion provides a substantial tailwind to economic activity, even before accounting for the upcoming impact of additional stimulus measures.
Looking ahead, new fiscal initiatives add further momentum. In the U.S., the One Big Beautiful Bill Act (OBBBA) passed in 2025 is expected to meaningfully boost economic growth. Similar expansionary programs are also underway in Europe, particularly through increased German infrastructure and defense spending, and in Japan.
For U.S. markets, domestic spending patterns matter most. Historically, recessions are difficult to trigger when governments are already spending aggressively, as fiscal policy normally becomes more supportive during periods of economic stress.
The chart below illustrates the projected GDP impact of OBBBA. The legislation includes meaningful investment incentives for businesses and is expected to increase after-tax income for many households. BlackRock estimates that the average working taxpayer could see a 43% increase in tax refunds relative to 2025 levels, creating a short-term boost to discretionary spending if consumers follow their typical tendency to spend rather than save.
Source: Model Portfolios. (November 2025). BlackRock.
AI Investment: A Second Powerful Tailwind
Beyond government spending, the continued build-out of AI infrastructure represents another major source of economic support. According to Goldman Sachs, capital expenditures by hyperscale technology firms are expected to reach approximately $540 billion in 2026. Nvidia CEO Jensen Huang has suggested that total AI infrastructure investment could reach $3–4 trillion by 2030.¹
Current estimates suggest AI-related capital spending could amount to roughly 1.6% of U.S. GDP annually for several years, surpassing even the scale of investment seen during the internet build-out of the late 1990s and early 2000s.
Source: Slok, T. (January 2026). Quantifying the Productivity Gains from AI Adoption. Apollo.
Taken together, massive government spending and sustained AI investment make a near-term recession less likely. The primary risk to this outlook would be evidence that AI fails to deliver meaningful economic benefits, though it will take time for such conclusions to become clear.
Corporate Profitability and the Productivity Question
Valuations remain a legitimate concern, even amid strong spending trends. One area providing support for elevated prices is corporate profitability. As shown below, U.S. corporate earnings have continued to grow steadily over the past several years. Historically, sustained profit growth has been inconsistent with recessionary environments.
Skeptics correctly note that a disproportionate share of recent earnings growth has been concentrated in AI-related technology companies. This concentration increases market vulnerability if expectations prove overly optimistic.
Ultimately, the success of AI will be measured by gains in labor productivity, like those observed during the adoption of personal computers and the internet. In simple terms, if AI fulfills its promise, the economy should be able to produce more output without a proportional increase in labor input.
Source: Slok, T. (January 2026). Quantifying the Productivity Gains from AI Adoption. Apollo.
Whether AI will generate these gains remains the defining investment question of the current cycle. For now, the AI buildout is doing a lot of heavy lifting to keep the global economy humming, especially the U.S. centric part.
Anti-Dollar Positioning and Global Diversification
While elevated government spending supports growth, it also increases debt burdens. Over time, rising debt levels may pressure the U.S. dollar and complicate future interest-rate policy. One concern is the possibility of fiscal dominance, where the Federal Reserve prioritizes government financing needs over inflation control. Such a shift would likely be inflationary and negative for the dollar’s long-term value.
Source: Vandersteel, T. (November 5, 2025). Fiscal Dominance in the USA: Investment Lessons from the Emerging Markets. GMO.
Currency values move in cycles. If the dollar faces structural headwinds due to sustained deficit spending, assets that have historically performed well in declining-dollar environments may become more attractive. International equities are one such category.
Source: Student of the Market. (July 2025). BlackRock.
In addition to currency effects, international stocks currently trade at lower relative valuations and offer higher dividend yields than U.S. equities. Dividends have historically been a significant contributor to long-term equity returns, particularly during periods of muted price appreciation. Long-term low return environments tend to begin during times of high market valuations, like U.S. stocks currently have.
Source: Authers, J. (October 28, 2025). Record Stock Prices Aren't the Result of Politics. Bloomberg.
Precious Metals as a Strategic Allocation
Another asset group that has historically benefited from declining dollar environments is commodities, particularly precious metals. Gold and silver have recently outperformed, driven in part by substantial purchases from global central banks.
Source: Reid, J. (September 23, 2025). How to Halve the US Debt in 20 Years. Deutsche Bank.
Central bank gold holdings now represent a larger share of official reserves than U.S. Treasuries for the first time since 2002.
Source: Slok, T. et. al. (January 2026). Understanding Demand for Treasuries and Why the Yield Curve is Steepening. Apollo.
Gold has also demonstrated defensive properties during market downturns while remaining capable of strong performance in rising markets, an uncommon combination.
Source: Harvey, C. et. al. (November 14, 2025). Gold: Bugs, Bears, and Myths. Man Group.
Despite recent gains, gold mining stocks continue to trade at relatively modest valuation levels compared to historical norms, suggesting additional potential if current trends persist. Like international stocks, low relative valuations, along with the falling dollar environment, should be a tailwind for this investment category.
Source: Casanova, I. (January 14, 2026). A Golden Year, with More Leverage Ahead. VanEck.
Discipline Matters Most When Valuations Are High
When overall high valuations make general investing, the wise investor looks elsewhere for opportunity while still staying invested for the long run. Current data trends suggest anti-dollar positions like international stocks with their better valuations and higher dividends is one option and another would be precious metals, with both asset categories benefiting from falling dollar value pressures.
In all environments, and especially in times of higher valuation and uncertainty, it is important to have a plan and follow the plan. Forming a plan initially is often easier than truly sticking to it in times of duress. As Mike Tyson said, “everyone has a plan until they get punched in the face” which follows the historic military saying, “no plan survives first contact.” To increase the odds of sticking with an investment plan, it is important to work with your CWM advisor to choose an investment style that will be tolerable WHEN market calamity ensues.
Depending upon your goals and risk tolerance, the discussion with your advisor will include one or a blend of the following approaches:
Whether pursuing gradual, data-driven risk management or maintaining consistent exposure aligned with long-term goals - or a blend of both, the CWM team remains focused on helping clients navigate complex markets with confidence, discipline, and flexibility. To discuss which strategy or strategies best fit your needs with a CWM advisor click here to schedule or contact us at (425) 778-6160.
Comprehensive Wealth Management, LLC (CWM) is an SEC registered Investment Advisor and Pacific Northwest wealth management firm that partners with clients to articulate and help achieve their financial goals as prudently as possible. Our high-touch, client-focused investment planning and implementation makes us the first call for executives, business owners, and other thoughtful investors to help strengthen their financial health holistically and intentionally, managing risk while pursuing long-term gains.
All investments involve the risk of potential investment losses as well as the potential for investment gains. Past performance is no guarantee of future results. This communication is informational only and is not a solicitation for investment advice. For specific advice about your situation, please consult with a financial professional.
Any strategy described may not be suitable for all individuals. Examples are provided for illustrative purposes only, and no representation is made that a person acting on these examples will achieve the results shown. Because investors’ situations and objectives vary, this information is not intended to indicate suitability for any particular investor.
The Performance Targeting System (PTS)™ is an exclusive investment strategy developed by the investment professionals at Comprehensive Wealth Management, LLC. The PTS is based around the idea that portfolios with stable annualized gains, and smaller drawdowns, are preferable to comparable models that try to maximize yearly returns with occasional but significant losses. Utilizing a variety of metrics, the PTS modeling process indicates the ratio of risk versus Safe Assets a portfolio should maintain in order to help maximize long-term returns (five years or more). Risk assets are targeted to perform better in years with rising equity markets, and Safe Assets are targeted to perform better in years with falling equity markets. This process potentially allows for overvalued assets to be sold ahead of significant market corrections and undervalued assets to be potentially purchased prior to significant rallies. By working to anticipate the longer-term multi-year market move, the goal of PTS models is to help obtain higher than average benchmark returns with less volatility. No system or strategy can by itself be used to consistently determine which securities to buy or sell or when to buy or sell them. The PTS system was developed using historical data that might not be indicative of future events.
Morgan contributes to the CWM team by thoroughly researching a wide variety of investment products and creating recommendation reports based on current market dynamics.
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