It comes up in every conversation. Why is the stock market hitting new highs with all that’s going on in the world? There seems to be a long list of things that should hold it back.

The war in the Middle East is disruptive and inflationary. World trade is in disarray. Governments have shed any semblance of fiscal responsibility and are spending future generations’ money with impunity.

Private markets, previously a tail wind for portfolios (takeover premiums; exit strategies; financing options) are constipated with a backlog of companies to sell, lower distributions to investors and a reliance on creative financing structures to keep the wheels turning.

And then there’s the rush to build data centres that is helping the economy grow but also prefacing a severe hangover (capex cycles don’t gradually slow down, they go from 100 km an hour to zero).

But you know all of that. You want to know what forces are pushing in the other direction.

Earnings: Companies are doing well right now. Profits are healthy and coming in above expectations – 80 per cent of S&P 500 companies that have reported first-quarter results beat analyst estimates. Recent earnings look backward, which Mr. Market never does, but demonstrate how resilient businesses are.

Artificial intelligence: It’s still too early to calibrate what AI will do for productivity and profits, but the optimism has no bounds, mostly because the technology is moving fast and is so impressive, but also because investors can’t put numbers to it. AI-related narratives aren’t constrained by mundane financial measures such as return on equity and price-to-earnings ratios. The sky’s the limit.

Fiscal fire hose: The White House’s trade strategy is highly disruptive but with some positive effects. New trade relationships are being formed, and economic nationalism is on the rise in Europe and Canada, specifically in defence and infrastructure. The countries that can afford to spend more are doing so, which stimulates the economy, and ultimately corporate earnings.

Borrowing costs: Despite a constant plea for interest rate cuts, financing costs are reasonable, certainly low enough to support robust economic growth. In Canada, a fixed five-year mortgage at 4 per cent could even be viewed as stimulative.

TACO: ‘Trump Always Chickens Out.’ Investors expect President Donald Trump to stick to his playbook – grand pronouncements and bluster followed by hesitation and backtracking.

Buy the dip: And they’re also confident that any market correction will be short and followed immediately by a dramatic rally. It’s been that way since the Great Financial Crisis.

Price paid

My research focuses on where asset prices will be in five years, with little regard to how they get there. In this context, I’ve tempered my expectation for returns, partially because of the factors mentioned above, but primarily because of something more concrete and reliable: valuations. It’s an immutable law of investing that what you pay for an asset is the single most important factor in determining its return (just ask condo owners in downtown Toronto and Vancouver).

A price-to-earnings ratio does nothing to predict a stock’s zigs and zags, but plays a huge role in determining what level it gets pulled toward with time. Right now, you’re paying full price for future earnings, even a premium in some areas. Stock valuations in most sectors are at the top, or above, their historical ranges.

Likewise, in corporate bonds, you’re getting little extra yield, or spread, for taking credit risk.

And I’m wary of valuations in two growing asset categories. First, aspirational assets such as precious metals and cryptocurrencies have no cash flow to value and solely depend on ever-changing investor sentiment. And second, privately-held companies produce cash flow, but the funds that hold them, and the lenders that finance them, offer little visibility.

Use it, don’t fight it

Whether you understand it or not, take advantage of what strong markets have to give.

Rebalance from a position of strength: If your portfolio has strayed from its target asset mix, it’s easy to fix.

Size your speculative investments: If you’re trading stocks and options, or investing in startups and cryptocurrencies, make sure the allocation is appropriate relative to the size of your assets.

Cash management: If you have known spending needs, now is a good time to set the money aside.

In other words, don’t fight what’s happening in the stock market. Enjoy it and quietly prepare for when things are just as confusing, but in the other direction.

Tom Bradley is a portfolio manager with Purpose Investments, co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.