Markets are reaching new highs: why are investors nervous?

Markets are back to enjoying record highs after faltering in March. The MSCI World has reached new peaks in May and rewarded investors with a return of 26% over the past year, as of 12 May. Looking at the numbers, it looks to be business as usual, and good business at that. So why do so many of us feel uneasy?

It’s healthy to have some level of market scepticism. Long-term investors know what can happen when markets become overly confident. And now, it feels difficult to reconcile what is going on in the world around us, with geopolitical conflict and rising energy prices, to a stock market that is behaving as if it is immune to the turmoil.

There are a few things to consider in this discrepancy. First, markets are ultimately motivated by earnings, and earnings figures for some of the largest companies in the world, such as Nvidia and Alphabet, have continued to beat expectations. In fact, valuations are lower now than they were last autumn in areas where investors have expressed concern recently that stocks are overpriced. The S&P 500’s technology sector, which holds many of those big names, now sits at 23 times earnings, down from 30 times earnings in the autumn of 2025, according to research from JP Morgan. Although share prices have been increasing, these companies’ earnings have been increasing faster.

Second, markets tend to be focused on the long term, and geopolitics can change quickly. While they create short-term noise in the markets as analysts look at possible consequences, it tends to calm down as the industry gets a grip on what is happening.

News feeds have weaved their way through our day-to-day life, which makes geopolitical conflict or other political uncertainty feel very immediate. But markets are considering factors that are much broader than the daily news flow that we see. People investing their own money make up a relatively small proportion of the broader financial markets. In the US, for example, its estimated to be somewhere between 20% and 25% of market buying and selling. So, while it might be the topic on our minds and those of our neighbours, the institutions which decide the destiny of a much larger piece of the market has other factors in mind as well that end up steering prices.

This isn’t to say that markets are set to simply rise. Investing comes with ups and downs, and you can be nearly sure that there will be more market dips to come. What matters for investors is if they have the time to ride dips out, and benefit from what has historically been an upwards trend. If you are feeling hesitancy around the market, it might be worth checking where your concerns are coming from.

Recency bias

It’s in human nature to put more emphasis on things that have happened recently rather than considering a long period of time. Recency bias is a function of how our memory works, and it’s quite handy in day-to-day life: It’s more useful to know where you put your keys 10 minutes ago than two months ago.

Unfortunately, it tends to work against us in investing. When markets have recently experienced a fall, we believe it’s bound to keep happening. And when markets have been consistently on the up and up, we believe nothing can go wrong. When it comes to investing, these are both flawed ways of thinking. Looking at long-term patterns tells us a much fuller story than just a few months.

If we based all our investing knowledge on what markets have done in the past three months, we’d end up quite stressed. The MSCI World has delivered a total return of more than 6% in this timeframe but also had lost over 6% midway through. This makes investing feel like quite a tumultuous ride.

But what if we look at markets on a five-year timeframe instead? It’s not without dips, but the trajectory is clearly up. Investing never comes with guarantees, and past returns don’t guarantee what will happen in the future. But you can start to see how the dips and recoveries are a normal part of the process. Interestingly, despite the past three months feeling quite stressful, the returns are above the historic average. Over this five-year period, the increase across three months would have been on average 4%, substantially below the 6% we’ve seen recently.

Are you worried about the economy, or the market?

The economy and the market certainly have links but are far from the same thing in practice. Consumer sentiment is low in the UK. A survey by PWC over the Easter bank holiday found that 38% of people believe their economic situation will be worse off in the next 12 months, and just 27% believe they will be better off. This quarter had the largest decrease in sentiment since the beginning of the Ukraine war.

It’s difficult to reckon a declining sentiment around money with a market that’s improving. Individuals are struggling with fears over job security and a rising cost of living. But for now, businesses don’t seem to be feeling the same crunch, and the market is growing. These are often the measures used when economists speak about the ‘K-shaped economy’. Markets are continuing to rise, benefitting those that can invest, but consumer sentiment continues to fall as day-to-day life for most people becomes more difficult, adding to financial anxiety.

One area where the nerves might be worth paying attention to is what this combination of markets and economy means for your individual situation. If you are still growing your investments, and plan to keep on this trajectory at least for the next five years or so, the biggest change might come in your contributions.

If inflation rises to a point where you need to budget differently, there may be less money left to invest in the market. But trying to keep that investment at least at its current level will mean much more potential for growth in the future. With time, having enough invested in a market that’s headed up could be a much more significant influence on your lifestyle than short-term cost of living pressures.