What happens when confidence in the market becomes the NEW RISK?

From the desk of Miles Everson:

Hi, everyone!

I’m excited once again to share with you another important topic in today’s  “The Independent Investor!”

Every Wednesday, I publish articles about basic investing tips with hopes to help you make wise financial and investing decisions.

For this article, I would like to highlight my friend and colleague, Professor Joel Litman’s investing-related coaching comment about the “wall of worry.” Ready?

Keep reading below to know more.

What happens when confidence in the market becomes the NEW RISK?

The world rarely quiets down long enough for investors to breathe easy.

Every week brings another flurry of headlines—political drama, trade disputes, or economic alarms—each one seemingly designed to shake confidence. 

Yet somehow, despite the noise, the markets keep climbing as if fueled by disbelief itself.

That relentless rise, according to  Rob Spivey , the Director of Research at  Valens Research, isn’t just a display of market resilience.

It’s the embodiment of what Wall Street calls the  “wall of worry” —a phenomenon where investors remain cautious, skeptical, and anxious even as stocks continue to rise. 

However, Spivey warns:  That wall may now be starting to crack.

For more than a year, investors have been scaling that wall. Inflation fears, rising tariffs, tight credit conditions, and geopolitical tensions have each taken turns trying to derail the market. 

Yet, through it all, the S&P 500 has not only endured but has also hit fresh highs.

In recent months, the headlines alone could have easily spooked even the most seasoned investors. Spivey pointed out a dizzying series of developments: 

New tariffs announced by President Donald Trump’s team—a 50% levy on copper, and suspended immigrant visa processing for citizens of 75 countries, including Brazil. 

Speculation about the Federal Reserve Chair’s future stirred uncertainty, while rising inflation, conflicts in the Middle East and Russia, and even Elon Musk’s musings about starting a political party all added fuel to the anxiety.

As Spivey observed, this is classic wall-of-worry behavior—where fear lingers, but prices rise anyway.

What’s Driving the Rally

According to Spivey, the surprising strength of the market rests on two solid foundations:  strong corporate earnings  and  resilient credit conditions .

Corporate profits rose by 9% in 2024 and are on track for another 8% increase in 2025. Companies have also begun reinvesting after years of underinvestment, spurred on by AI innovation and a restructured global supply chain.

Everywhere one looks, there’s a new data center breaking ground, a breakthrough in artificial intelligence making headlines, or a fresh wave of product innovation capturing investor attention. 

These powerful trends are fueling the economy’s next phase of growth and keeping the market buoyant even in the face of uncertainty.

However,  something  is changing. 

Spivey cautioned that even the strongest rallies eventually show signs of strain. The data suggests the market could be overheating for the first time since the so-called “Liberation Day” tariff tantrum.

One key measure he highlighted is the  National Association of Active Investment Managers (NAAIM) Exposure Index, which tracks how much of their portfolios active managers have allocated to equities. 

The long-term average typically sits between 60% and 65%. In July 2025, that number surged to nearly 99%, which meant most active investors are “all in.”

Spivey said these levels never last. When everyone’s fully invested, there’s little dry powder left to keep pushing prices higher.

At the same time, valuations are stretching. The Uniform P/E ratio climbed from 22x to about 24x earnings—a sign that optimism might be running ahead of fundamentals.

Despite this, Spivey was quick to clarify that stretched valuations alone don’t trigger bear markets. Historically, markets don’t collapse just because stocks are expensive; they fall when fear over earnings or credit sets in.

What investors can expect instead is more  choppiness. When sentiment and valuations peak, the market often shifts into sideways trading. Good news loses its impact, while bad news suddenly feels magnified.

According to Spivey,  a short-term pullback wouldn’t be surprising, but that doesn’t mean the long-term story has changed .

Staying the Course

Despite flashing signs of overconfidence, the underlying tailwinds—corporate earnings growth, strong balance sheets, and secular innovation trends—remain firmly in place.

Spivey’s message to investors is clear:  Don’t let fear—or the headlines—push you out of the market.

Corrections come and go, but the fundamental drivers of value creation persist.

He said:

In summary, Spivey’s analysis paints a nuanced picture of today’s market: One defined by resilience, supported by earnings, yet tinged with signs of overconfidence. 

For investors, it’s a moment that calls for  perspective , not panic.

After all, in the ever-turning rhythm of the market, the  real  winners are rarely those who react to fear, but those who recognize when fear itself  is  the opportunity.

Hope you’ve found this week’s insights interesting and helpful.

Stay tuned for next Wednesday’s The Independent Investor!

2025 was a solid year for the American economy.

Learn more about  the importance of ignoring the sentiment “noise”  in next week’s article!