Being optimistic is good for you – and that’s a fact. In the white paper The Neural Basis of Always Looking on the Bright Side, psychiatrist Owen O’Sullivan noted that a positive outlook is something of an evolutionary necessity, as “to reconcile the full spectrum of conceivable eventualities would be endlessly time-consuming and tortuous”.
This is why human beings tend to discount the possibility of experiencing a negative event – such as the death of a loved one, being diagnosed with a serious illness, or suffering an accident – even when it is a statistical likelihood.
In fact, the paper found that the only group of people to maintain a systemic pessimistic bias, overestimating the likelihood of a negative outcome and underestimating that of a positive one, are those affected by severe depression. All others, said O’Sullivan, generally “overestimate the likelihood of success in work, relationships” and, crucially, “financial investments”.
What moves share prices?
Upgrades to profit forecasts are one of the biggest determinants of future performance of a share price. From that point of view, the past year looks like it has been a fantastic one for the prospects of global equities.
At the end of August 2025, just 1.8% of companies in the MSCI AC World index had received profit upgrades from analysts on a net basis. By the end of the year, that figure had risen to 2.7%.
Today, as at the end of August, it stands at 4.1% – more than doubling in just 12 months.
There’s a tension here for me. Yes, forecasts of profit upgrades are a good thing. But is there a point where this is more about natural human biases? Should we be sceptical?
I’ve recently been watching a programme called ‘the news’ and the main storylines over the past year are not ones that have traditionally made investors excited about the future: the US starting another unwinnable war in the Middle East; rising energy prices, inflation and bond yields; and the world’s biggest companies loading up on debt to gain a foothold in a technology they don’t even know will be profitable.
What else determines performance?
Perhaps I’m overstating things. The economy is not the stock market and corporate profits look healthy in many regions and sectors, particularly Europe and emerging markets.
Yet in others, retail investor participation and the growth of the momentum trade have led the market to become concentrated in a small number of themes – namely AI and its supporting players. This is especially true of the US, which now accounts for more than 70% of the MSCI World index.
Here, I wonder if growing analyst optimism is reflective of the pressure to justify higher valuations. On the whole, it’s difficult to see how the strong returns delivered over the past five or six years can be sustained.
Back to basics
So what approach should investors take in this environment? I would suggest going back to the factors that determine future performance. After analyst revisions, this means starting valuations. Whether earnings estimates are rising or falling, they remain just that – estimates. Low starting valuations at least offer a margin of safety.
The benefits of buying inexpensive stocks have become obvious in the period since we emerged from Covid. The list of best-performing markets over this time is dominated by unfashionable European countries such as Spain and Italy, for two main reasons: first because starting expectations for these areas were so depressed, with a lot of bad news already priced in; and second because they offered attractive dividend yields, an underappreciated component of your total return.
After lockdowns ended, it quickly became apparent we were in a very different environment to that of the 2010s. Yet many investors just picked up where they left off.
In most cases, they paid a heavy price. Labels such as ‘quality’ or ‘growth’ offered little protection for companies on lofty valuations as inflation pressures eroded profit margins while geopolitical issues and protectionism challenged the multinational business model.
Behavioural biases
Five years on, not an awful lot has changed. Although the switch from growth to value is under way, many of the biggest funds in our peer group continue to sit on a valuation premium to the market. Meanwhile, global tracker funds have two-thirds in the US when both its equity market and currency look expensive.
Perhaps this goes back to optimism and other behavioural biases. Some investors are averse to selling at a loss, even when earnings continue to fall. Others may be reluctant to ditch a strategy that has worked in the past.
Perhaps most difficult of all is to leave the safety of the herd when doing so would mean admitting that expectations for whole swathes of the economy are based on little more than hope.
It’s good to stay positive, but we know that humans have a bias towards overlooking negative scenarios even as their likelihood grows exponentially larger. And, in such circumstances, I would probably prefer to be miserable.
Raheel Altaf is a fund manager in the SmartGARP team at Artemis. The views expressed above should not be taken as investment advice.