New Highs, Old Lessons: Staying Invested and Diversified in an AI-Driven Market
It has not felt like a normal year in markets.
Between headlines about trade tensions, elections, and interest rates, many investors describe this year as “uncertain” or even “uncomfortable.” Yet when you step back from the day-to-day noise and simply look at the scoreboard, you see something very different:
The stock market is quietly having another record-setting year.
A Market that Keeps Finding New Highs
So far this year, the S&P 500 has set 36 new all-time highs. And while that’s fewer than last year’s pace, it still ranks 18th out of the past 98 years. In other words, this is not an ordinary year, it’s a year in which the market has spent a lot of time in record territory.
And it is not just one index. The S&P 500’s strength is part of a broader pattern across major equity markets. For example, the Nasdaq composite index has logged 36 new highs, the Dow has posted 17, and even the small-cap Russell 2000 index, which spent years stuck below its 2021 peak, and has now recorded six new highs after finally breaking through that old ceiling.
So then, if you only checked your account periodically, you might simply see “up double digits” and move on. But, the more interesting story lives beneath those numbers: what is driving these gains, and how healthy is this advance?
The AI Boom: Powerful Tailwind, Narrow Leadership
And so, what’s been driving this year’s rally? Well, the clearest theme this year has been artificial intelligence (AI).
That’s because companies are spending hundreds of billions of dollars to train AI models, to build and cool data centers, and to secure the power needed to run it all. To this point, Nvidia recently became the first company to reach a market value above $5 trillion. At the same time, large technology firms such as Microsoft, Amazon, Alphabet, and Meta are reporting strong growth that is directly tied to demand for their cloud and AI-related services.
And as capital flows into this theme, AI-linked stocks have moved sharply higher. Because many of these companies are very large, their gains have an outsized effect on the indices they belong to. That’s one reason the broad market can look very strong at the index level even while many individual companies are treading water or declining.
Indeed, you can see this in the Russell 1000 Index, which tracks a wide universe of large and mid-sized U.S. companies. For example, on a market-cap-weighted basis, the Russell 1000 is up about +14% year-to-date, which is a number you are most likely to see in headlines.
However, if you give every stock an equal weight, the return is closer to +6%. And if you line up all the individual companies and look at the one in the middle, the median stock is up only about +2%. Put differently, nearly half the companies in the index are actually negative for the year, with 462 names in the red.
What this tells us is simple: A relatively small group of very large companies, powered by the AI theme, is doing a lot of the heavy lifting. With this narrow leadership, the average stock is not enjoying the same party the indices suggest.
Beyond AI: the Fed, the Economy, and Earnings
With all that said, while AI is getting the headlines, it’s not the only driver of this market.
That’s because after a nine-month pause, the Federal Reserve restarted its rate-cutting cycle in September. And over the past two months, the Fed has lowered interest rates by a total of 0.50%. This is important because lower borrowing costs help ease pressure on consumers and businesses alike. And they also support higher valuations for risk assets like stocks. On top of that, markets tend to look ahead. Expectations for additional cuts in the coming year have created a tailwind for equities.
At the same time, the U.S. economy has proven more resilient than many expected as it has continued to grow while navigating a long list of headwinds, including trade policy and tariffs, geopolitical tensions, political noise, and even a government shutdown. And make no mistake, none of those issues are trivial, and yet the economy has continued to move forward.
At the same time, corporate earnings tell a similar story. Profit growth remains solid, and third-quarter earnings came in ahead of expectations. This is imporant because over long periods of time, stock prices tend to follow earnings. And while it doesn’t mean that they move in a straight line, what it does mean, is that healthy, growing profits provide a fundamental foundation underneath the price action we see.
Put together, you have a powerful combination of an economy that is bent but not broken, a central bank that has shifted from “higher for longer” to modest cuts, and a highly visible growth theme in AI that is attracting both capital and optimism.
The Emotional Challenge: Good Markets, Bad Headlines
For many investors, this year has not felt like a year in which the S&P 500 returned nearly +15% and notched 36 new highs.
The reason is that the emotional experience of investing rarely matches the outcome in the numbers.
Because here’s the thing: if you had known the headlines in advance at the start of the year, you might have assumed the market would struggle with trade tensions, policy uncertainty, geopolitical flare-ups, a government shutdown, and elections on the horizon.
In that environment, it would have been very easy to say, “I will step aside until things calm down.”
The problem is that markets often climb a wall of worry.
By the time the news feels “safe,” a significant portion of the returns is already behind you. So then, stepping aside means you not only have to decide when to get out, you also have to decide when to get back in. That is the essence of market timing, and history shows that it is extremely difficult to do consistently.
This year has been another reminder that trying to outguess the market based on headlines can be costly. Missing just a handful of strong days or weeks can put your long-term goals at risk.
The Planning Lesson: Stay Invested, then Stay Diversified
Every year offers a different lesson for investors.
And this year has underscored the value of staying invested through periods of uncertainty. That’s because investors who allowed headlines to push them to the sidelines risked missing out on meaningful returns and the long list of new highs.
Looking ahead, the next lesson may focus on a different lesson: diversification.
When a relatively small group of AI-linked stocks is carrying much of the market’s gains, it can be tempting to chase what’s working and load up on whatever has gone up the most. And that approach may feel smart in the moment, especially when everyone is talking about the same names.
But here’s the thing: true diversification is less exciting. It means owning parts of the market that are not currently in the spotlight. It means keeping exposure to areas that have lagged, even when the story feels old or uninspiring. It means remembering that the goal is not to win every short-term race, but instead to finish the marathon.
If 2025’s lesson is that staying invested matters, then 2026 may remind us that how we stay invested matters just as much. That’s where a portfolio that is thoughtful, diversified, and aligned with your financial plan is better positioned to weather changes in leadership, economic surprises, and policy shifts.
Bringing it Back to Your Plan
As always, the most important market is the one that lives inside your own financial plan.
The question is not, “Can I predict the next 36 new highs?” The better questions are:
- Are my investments aligned with the goals I want to accomplish?
- Is my portfolio diversified across different asset classes, sectors, and regions, or is it overly dependent on a single theme?
- Am I relying on headlines to make decisions, or am I following a clear, disciplined process?
Our work together is designed to keep you anchored to that process. Markets will continue to move from one narrative to another: AI, interest rates, elections, something else after that. Your plan should remain the steady reference point that guides how we respond.
If you have questions about how this year’s market dynamics are affecting your portfolio, or if you are wondering whether your diversification is where it needs to be, let us talk. The goal is the same as always: to pursue returns in a way that supports your long-term purpose and provides clarity, confidence, and peace of mind along the way.