What All-Time Highs Really Mean for Credit Ratings

In the world of investing, the fear of market peaks is deeply rooted. Investors often hesitate to deploy capital when equity indices are at all-time highs, fearing an imminent correction. But this fear is not only frequently misplaced—it may also distort long-term financial strategies and, by extension, the interpretation of creditworthiness and risk metrics. Duncan Lamont, CFA and Head of Strategic Research at Schroders, challenges these common perceptions by analyzing nearly a century of US stock market performance.

According to Lamont, “the market is at an all-time high more often than people realise.” In fact, his data show that in 31% of the months since January 1926, the US equity market was at an all-time high. More importantly, performance after these peaks is not only solid—it’s statistically superior. “12-month returns after a record high were, on average, 10.4% above inflation, compared to 8.8% in other periods,” Lamont writes.

This insight has significant implications for credit ratings. Credit analysis often incorporates market sentiment, economic outlooks, and investor behavior. If markets at all-time highs are not, in themselves, predictors of downturns, then credit models that overly weigh cyclical peak-risk sentiment might be overestimating default probabilities or underestimating resilience. In other words, pro-cyclical bias in rating assessments may be unjustified.

From a credit rating agency’s perspective, these findings challenge risk premia that spike during perceived market peaks. If firms are downgraded or outlooks are revised based on assumptions that market highs imply instability, this may not be grounded in historical reality. Similarly, for structured products and funds, volatility assumptions built into credit assessments could become overly conservative during bullish periods, skewing the balance between risk and return.

Furthermore, the broader message has systemic relevance. If institutional investors avoid reinvesting during market highs, they may create liquidity imbalances, feeding volatility and credit dislocations that are more reflective of human behavior than of fundamental risk. As Lamont writes, “There may be good reasons not to invest in stocks, but the market being at an all-time high should not be one of them.”

Credit analysts, therefore, must be cautious not to conflate price levels with credit risk. Valuations and solvency are not the same, and empirical data suggest that market highs are more often a reflection of underlying strength than a warning sign of collapse.

Ultimately, Lamont’s work reinforces a simple but overlooked truth: risk perception is not always risk reality. For credit ratings to remain robust and predictive, they must reflect this distinction—especially when markets are flying high.