A former portfolio manager has expressed increased confidence in equity markets compared to a year ago, highlighting shifts in valuation metrics and earnings forecasts as key factors influencing his outlook. Despite a history of caution, including a complete exit from equities by the end of October last year, he now sees conditions as more favorable for investors.
At the close of 2025, the portfolio manager had divested all equity holdings, citing concerns about market exuberance after a strong year-to-date performance. His portfolio was up 17% since January 2025, outperforming the S&P 500 despite having no U.S. stocks. This led him to move to a fully cash position for five months, reflecting a cautious approach toward what he considered an overheated market.
In contrast, the current year’s returns have aligned more closely with broad market benchmarks. So far in 2026, his portfolio has gained about 11%, roughly matching the S&P 500 in U.S. dollar terms, though trailing by four percentage points when measured in British pounds. He notes that equity valuations appear less stretched now than they did at the same point last year, despite notable developments such as the high-profile SpaceX listing and the surge in borrowing associated with the growth of artificial intelligence sectors.
A decisive factor behind his more optimistic view is the improvement in forward price-to-earnings (P/E) ratios across multiple markets. He observes that investors now receive greater earnings per dollar invested compared to a year ago, indicating more attractive valuations. In particular, forecasted earnings in the U.S., Japan, Latin America, and the U.K. have all risen sharply—by as much as a third in some regions. Latin America’s earnings outlook is described as nearly doubling.
The manager also points to the example of Nvidia, which was previously deemed expensive with a forward P/E of 50 but subsequently saw its share price multiply sixfold alongside even stronger earnings growth, leading to a sharp reduction in its P/E ratio. He suggests that a broader market trend of earnings growth outpacing valuations is underway, rebutting concerns that equities remain overpriced.
Looking back, he estimates that the P/E ratios calculated a year ago understated the earnings growth that subsequently materialized. For instance, the U.S. forward P/E then was about 25 times, but given the earnings now expected, it effectively resembled closer to 18 times at that time. Similarly, Japan and the U.K. saw comparable downward revisions in effective valuations.
The earnings acceleration began only after geopolitical tensions, specifically Iran-related events, intensified early this year. Despite ongoing risks, the portfolio manager argues that the current market environment presents fewer valuation concerns and more opportunity to capture earnings growth.
He acknowledges the persistent presence of risks but considers the primary uncertainty shifting from the threat of falling valuations to the possibility of missing out on earnings growth. His outlook depends on factors such as the adoption and utility of AI technologies like ChatGPT, pricing dynamics in computing infrastructure, and the potential regulatory landscape governing AI.
While cautious about the unpredictable nature of markets, he expresses a tentative optimism in light of recent trends and the resilience of equities amid rising bond yields. Still, he notes his historical experience of fluctuating investment sentiment and leaves room for changing views as conditions evolve.