The summer saw the return of the immutable market pendulum, where sentiment can swing from ‘hopeless’ to ‘flawless.’ After April’s lows, the S&P surged more than 30 percent in just two months, one of the fastest rallies in recent history, while the TSX hit multiple all-time highs.

While the underlying economic challenges haven’t changed much, the surge in optimism wasn’t entirely misplaced: economic growth has proved more resilient than expected, trade tensions have eased as new agreements are negotiated, and many expect central banks to cut rates if conditions weaken.

Investor enthusiasm has also been fueled by solid earnings of big technology companies tied to artificial intelligence (AI). Their scale of investment is striking. The top four tech firms alone are expected to spend over $320 billion on AI capex this year, or around one percent of total U.S. GDP.¹ Some analysts have even asked whether the U.S. economy would have contracted without this spending.

Despite AI’s current surge, it’s worth noting that its roots go back to the 1950s and Alan Turing’s “Turing Test” for machine intelligence. What has changed is the pace of progress, driven by exponential increases in computational power, vast datasets and advanced machine learning. Consider that global data creation is expected to exceed 180 zettabytes (ZB) in 2025, compared to the terabytes (TB) of the late 1980s (1 TB = 0.000000001 ZB). Back then, 1 TB of storage cost over $20 million; today, it is well under $100—a mind-blowing drop over 40 years!² We are now on the steep part of this exponential curve: decades of gradual progress have given way to rapid, real-world breakthroughs. Few doubt that AI will be an economic driver in the years ahead. But the adoption of any new technology doesn’t guarantee success for all early players and, as history reminds us, expectations can often overshoot reality.

Indeed, the excitement has extended valuations. Over the summer, the S&P 500 traded at 22.0x forward earnings with the top 10 stocks at 28.8x, well above the 30-year average of around 16.7x.³ The S&P/TSX sat lower at 17.0x, reflecting Canada’s greater weight in value-oriented sectors like energy and financials. For perspective, at the height of the dot-com boom, the S&P 500 traded at 24.2x. Yet, today’s valuations can be viewed through differing lenses: lower interest rates increase the present value of future cash flows; high-growth sectors may warrant higher multiples when innovation and productivity gains are expected to persist; and supply/demand dynamics have shifted. The number of U.S. publicly-listed companies has fallen by half since 1996, to around 4,000 today, while retail participation has surged: 62 percent of households own stocks, up from under 40 percent in the early 1990s.⁴

Still, momentum can carry much further than many expect before fundamentals reassert themselves. As the saying goes, in the short run, the market is a voting machine, but in the long run, it is a weighing machine.⁵ The pendulum between fear and optimism will continue to swing, amplified by headlines and rapid technological change. For investors, the challenge is not to be swept along with each swing. A commitment to a wealth plan grounded in quality, diversification, and a focus on long-term value creation can serve us well no matter where the day-to-day markets take us.

<sup>1. https://www.ft.com/content/634b7ec5-10c3-44d3-ae49-2a5b9ad566fa;
2. https://ourworldindata.org/grapher/historical-cost-of-computer-memory-and-storage;
3. 1/1/96 to 6/30/25. https://awealthofcommonsense.com/2025/08/meme-stocks-mr-market/;
4. U.S. households; Canadian data shows a similar trend. Federal Reserve (2025), https://www.axios.com/2023/10/18/percentage-americans-own-stock-market-investing;
5. Benjamin Graham, The Intelligent Investor.</sup>

^‍