Heading into 2024, few could have predicted the remarkable resilience and continued dominance of a small handful of mega-cap technology stocks. After a volatile 2022 and rise of the Magnificent Seven (Mag 7)¹ in 2023, many expected market leadership to broaden, yet concentration remained a defining characteristic of equity markets. In 2023, the S&P 500 returned 26.3%, while the Mag 7 returned 76%. In 2024, the S&P 500 returned 25% while the Mag 7 advanced 48.5%. Altogether, the S&P 500 gained over 25% for two consecutive years. Moreover, on an individual stock basis, only 29% of S&P 500 constituents outperformed the index (and 34% of stocks had negative returns), underscoring the dominance of a select few companies. Meanwhile, shifting interest rate expectations, geopolitical instability, and evolving macroeconomic conditions added further complexity.

As 2025 gets underway, we once again find ourselves facing an unpredictable market environment driven by President Trump’s tariff policy announced during “Liberation Day” (April 2, 2025), elevated U.S. equities valuation levels relative to their historical averages, an anticipated slowdown in global growth due to protectionism trade policies, and souring U.S. consumer sentiment.

Key questions loom: Will the Trump administration roll back tariffs to ease market volatility, given the S&P 500 has declined 9.8%² since its February 19th peak? Will the U.S. dollar remain under pressure as investors seek safety in other currencies such as the Japanese Yen or Swiss Franc? Will the Federal Reserve continue to hold the fed funds target range steady, or will tariffs cause inflationary pressures to rebound and force a shift in monetary policy? Can market leadership rotate away from a handful of dominant companies, or will artificial intelligence (AI)- driven growth lead to a rotation back into the Mag 7? These uncertainties reinforce a fundamental truth: While it is tempting to make investment decisions based on predictions, history has shown that market cycles rarely unfold as expected.

The temptation to time the market – jumping in and out based on short-term moves – can be strong, especially in periods of uncertainty. However, history continues to show that successfully predicting market returns is exceptionally difficult, and missing just a handful of the market’s best days can significantly impact long-term returns.

We believe that market timing is not a reliable investment strategy. Instead, staying invested through market cycles and maintaining a disciplined long-term approach, staying diversified, and ensuring portfolios are resilient across different market conditions remains the best way to build wealth over time.

What is market timing?

We define market timing as the speculative strategy of making buy or sell decisions based on predictions of short-term market price movements. Importantly, market timing decisions are based on estimating the returns of the market (or corresponding index), such as U.S. large cap stocks, rather than a particular security.

Market timing strategies can involve several different approaches. One approach employs using nonfinancial indicators to predict market movements. For example, one may attempt to predict what may happen to U.S. equity markets if a given presidential candidate were to win an upcoming election. Such an investor may determine that the risk of an unfavorable candidate winning the election warrants staying out of the market until the election is resolved.

Another approach involves the use of technical indicators, such as historical stock prices. In this case, an investor might notice that the MSCI ACWI has generated positive returns for the past five years and may decide to wait for the “bubble” to burst.

Yet another common approach is timing based on historical market valuations. An investor utilizing this approach might make valuation comparisons across time or different markets. While keeping track of these data points can be helpful, attempting to base entry or exit decisions on them may be detrimental to long-term returns. There are too many other variables that influence market returns over the short to medium term, and it’s difficult for anyone to make accurate predictions on macro issues over a long period of time.

Time in the market vs. timing the market

Of course, investors would love to be able to time the market perfectly, investing at market bottoms and moving to cash at peaks. Unfortunately, such market timing is challenging for all investors, no matter how sophisticated. We adhere to the adage that “it is about the time in the market, not timing the market” that allows investors to best position themselves for strong long-term results. A long time horizon that benefits from the power of compounding is much more impactful, and generally more successful, than the mirage of market timing.

Instead of trying to time the market by monitoring broad market, economic, or political indicators, investors should utilize a bottom-up, fundamental approach with a long-term horizon to select high-quality individual securities trading at a discount to estimates of intrinsic value.³ Such an approach is the most reliable way to generate attractive long-term returns. In addition, investors are also well served by implementing a rebalancing strategy that optimizes the benefits of such actions without the potential tax consequences.

What is the allure of market timing?

Despite the abundance of evidence suggesting that market timing is a futile exercise, its allure persists. Why? One hypothesis is that this strategy is a response to the legitimate realities of investing as well as behavioral biases. Specifically, all investors can see how beneficial it would be if they could predict market movements and adjust a portfolio in advance of those movements. Doing so would allow one to dramatically outperform the gold standard of a buy-and-hold strategy over the long term.

Looking at the following chart, the “all-knowing” investor would have moved out of developed international and into small-cap equities at the end of 2015, only to rotate into emerging market equities at the end of 2016. In theory, that investor would be able to generate returns at a level rarely attained.