Why markets remain at record highs

Record stock-market levels do not necessarily mean that shares are overpriced. Higher prices may be justified when company earnings rise with them, but a weaker earnings report or forecast could trigger a decline if valuations depend mainly on optimism.

That leaves investors weighing more than daily price movements. Share valuations reflect expectations for profits and interest rates, while bond prices depend heavily on market-rate movements linked to inflation and central-bank decisions. Geopolitical shocks and energy prices also affect both markets.

The breadth of the rally matters as well. If most of an index’s rise comes from a small group of the largest companies, events at one business can influence the performance of the entire index. Investors are therefore watching which companies are driving the records and whether earnings support their valuations.

Artificial intelligence has added another layer to the market story. Its development requires growing investment in data centers, electricity, power networks and energy supplies, as well as copper. The initial enthusiasm focused mainly on chip manufacturers and the biggest technology companies, but the investment needs now extend into the infrastructure required to support AI.

Investors are also watching inflation, employment and economic activity for clues about the direction of interest rates. Expectations for those rates affect bond prices and yields, and they influence how investors value companies. Generali Investments is presenting these issues in a free webinar titled “From Interest Rates to Artificial Intelligence: Hot Stories in Financial Markets.”