Market insights and analysis

By Will Hubbard

Stocks are making new highs again. But when I look at the stretched valuations and softening return outlook, I can’t help but wonder: Are investors really being rewarded for the risks they’re taking? Lately, I’ve been thinking about the alternatives—especially those that don’t require betting everything on the next leg up.

Investor discipline is slipping

For years now, investors have been told to stay the course—and they’ve done just that. “Buy the dip” became almost second nature after the global financial crisis and was practically hardwired into investor behavior after the COVID crash in March 2020. Even through the rate hikes of 2022, investors kept returning to the equity well, believing the pain would pass and prices would bounce.

But lately, that behavior feels less like conviction and more like habit. Some investors are chasing returns simply because stocks keep going up—not because the risk-reward trade-off still makes sense. It’s as if the mantra has shifted from “buy low, sell high” to something closer to “buy high … and buy higher.” Momentum can work in the short term, but blind momentum—without a plan to adapt—is something else entirely.

Are stocks just too expensive?

Now, some of the most respected voices in investing are tapping the brakes. Howard Marks of Oaktree Capital is raising an eyebrow at current valuations. And perhaps more tellingly, Vanguard—the gold standard for passive, long-term investing—has tilted its dynamic allocation model sharply in favor of bonds. The current mix? Roughly 70% fixed income, 30% equities. That’s a pretty big shift for a company built on sitting tight through thick and thin.

With Vanguard starting to eye bonds more favorably, it’s worth asking: Are stocks simply too expensive for their own good?

Valuation metrics are flashing yellow

One way to evaluate that is by comparing earnings yields to the 10-year Treasury. This comparison gives us a sense of how equities stack up against “risk-free” alternatives. Typically, when markets are beaten down, earnings yields rise, suggesting investors are being compensated for the risk of buying equities at depressed prices.

Today, that is not the case. Right now, the S&P 500’s earnings yield is just 3.86%, according to YCharts. The 10-year Treasury is yielding around 4.34%, per CNBC. That’s a troubling inversion. Investors are being paid more to take zero risk in Treasurys than to own an equity index.

Warren Buffett once said, “Price is what you pay, value is what you get.” But when the expected returns from equities fall below the guaranteed yield from government bonds, something’s broken in the relative value proposition. And we’ve been here before. JPMorgan’s most recent “Guide to the Markets” shows that since 1999, when the S&P’s price-to-earnings (P/E) ratio is around 23 (where it is today), the subsequent five-year annualized returns tend to fall on the lowest end of the scale.

Is equity risk still worth it?

Think about the markets since 1999. We’ve had long stretches of substantial growth, but also three major disruptions: the dot-com crash, the global financial crisis, and COVID. And yet, today’s valuations are right back at the upper end of that multi-decade range. So the real question becomes: Are you being compensated for equity risk with the returns you expect, or are we heading into a period where you’ll be holding stocks and watching returns stagnate—or turn negative?

Fixed income is finally competitive again

Meanwhile, the bond market is offering something it hasn’t in years: real yield. Nominal yields are over 4%, while inflation is under 3%. That means investors are finally getting a positive real return, something we haven’t seen much of in the past decade. And if the Fed cuts rates before year-end, bond prices could rise as well.

This isn’t the bond market of the past, where low rates meant low returns. It’s a reemerging asset class with asymmetric upside potential in a market where stocks look increasingly expensive. And institutional investors are taking notice, reallocating not just to bonds, but to gold, private credit, and other alternatives like CTAs.

What about CTAs?

That last one—CTAs (commodity trading advisors)—is worth a closer look. While trend-following CTAs have struggled in 2025, they’re built to adapt. These systematic strategies trade across equities, bonds, currencies, and commodities, and they’re designed to respond dynamically to changing markets—especially those in transition or dislocation. For more on how CTAs work and their role in navigating uncertainty, check out my recent articles: “Opportunities in ‘in-between markets,’” “Will investors make 2025 the year of the CTA?,” and “From sticky notes to CTAs: Finding opportunity in the unexpected.”

Flexible Plan Investments (FPI) incorporates specialized mutual funds offering exposure to alternative asset classes into accessible investment solutions (to learn how, read Jerry Wagner’s piece, “FPI brings Eckhardt’s elite trading strategies to your portfolio”). For investors looking to diversify beyond the usual 60/40 allocation, CTAs can offer a powerful way to introduce adaptability into a portfolio without abandoning core holdings.

Adaptability may be the real alpha generator

You don’t have to abandon equities, but it might be time to recognize the other opportunities available. Bonds and alternatives—like CTAs, which are designed to systematically adapt to the unknown—may offer better risk-adjusted potential when paired with a dynamically risk-managed approach.

I believe the risk-adjusted case for bonds hasn’t looked this good in a long time. Today’s rally reminds me of a game of musical chairs: as long as the music plays, investors keep circling with confidence—but when it stops, only those prepared find a seat. Without that preparation, equity holders may be left with lackluster or even negative returns while earnings try to catch up to prices. Right now, it’s hard to see how those prices are justified by value.