A surprising outcome of the railway bubble🚂
Plus a charted review of the macro crosscurrents 🔀
📉The stock market fell last week, with the S&P 500 shedding 2.0% to end at 6,740.02. The index is now down 3.4% from its Jan. 27 closing high of 6,978.60 and down 1.5% year-to-date. For more on the stock market, read: 2026 could be crappy for the stock market, and that would be normal 📉
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One of my favorite research reports is UBS’s “Global Investment Returns Yearbook.”
The 310-page encyclopedic review of historical financial market data is authored by Professors Paul Marsh, Mike Staunton, and Elroy Dimson, who have been updating the compendium annually since 2000. It builds off of work they published in the popular “Triumph of the Optimists.”
The authors do a nice job of applying analytical rigor to data often taken at face value. Last year, I wrote about how they challenged the assumptions that stock market returns were mean-reverting. Read more here.
On a Tuesday media call, Dimson discussed the ups and downs of past experiences with emerging world-changing technologies and the bubbles that often accompanied them.
“New technologies have transformed the world, but they’re typically disruptive,” he said. “Rail disrupted canals. Rail was disrupted by trucking and by air. People were very worried about an AI bubble. … The current concern has switched over to FOBO — fear of becoming obsolete — due to AI. And that’s what new technologies do. They disrupt.”
These disruptive technologies don’t follow the same paths, which should have investors thinking carefully before going all-in on the AI hyperscalers or avoiding them outright.
“Some technologies have been good, long-term investments,” Dimson added. “Others have not. It would not have been wise in hindsight to have invested in canals in Britain in the late 18th and early 19th centuries. They were disrupted by rail, and they lost a great deal of money. So some technologies have been great. Others have not.”
At this point, it’s hard to imagine something interrupting the current trajectory of AI. But trains were once hard to imagine, too.
Industries will go extinct, and new ones will emerge 📉📈
One of my favorite visuals from the report is the one below showing U.S. stock market industry weightings in 1900 versus the present.
It reminds us that the stock market’s long-term growth has come with massive changes beneath the surface.
“Of the U.S. firms listed in 1900, some 80% of their value was in industries that are small or extinct today, including railroads, textiles, iron, coal, and steel,” the authors wrote. “Meanwhile, 70% of today’s companies in the U.S. come from industries that were small or non-existent in 1900. Technology and healthcare were almost totally absent from stock markets in 1900.”
That’s the markets and the economy for you. Industries rise and fall. Jobs come and go. And yet the markets and the economy always manage to come out on top.
A surprising outcome of the railway bubble 🚂
I often cite rail as a great example of a once-dominant industry that contracted as a share of the stock market even as the overall market rose.
But the authors pointed out something that surprised me: Declining industries can still offer attractive long-term returns.
“Investors often associate new technologies with ‘bubbles’ and periods of subsequent under-performance,” they wrote. “However … railroads, despite being a declining industry over the period of the study (falling from 63% of the U.S. market in 1900 to less than 1% today), actually outperformed both the U.S. stock market and their newer technology competitors since 1900.” [Dimson said trucking was added to the chart in 1926, and airlines were added in 1932]
“So there is money to be made in declining industries,” Dimson said. “We should not ever write them off.”
The UBS authors also noted that the tech industry responsible for the dotcom bubble went on to outperform the market even after that bubble burst.
“New technology does not mean you’re going to have a bubble for sure,” Dimson said on the media call. “And even if there is a bubble, that can still be a good long-term investment, as we’ve seen with technology.”
The big picture 🖼️
It would be consistent with history if AI leads to massive changes in the makeup of the stock market. In the process, today’s leaders could become tomorrow’s laggards.
And all of this could happen even as the overall market continues to move higher.
Furthermore, it’s possible that stocks and sectors that appear to be in a bubble continue to generate strong returns in the years to come.
And perhaps industries being most disrupted by AI will continue in some form. After all, we still rely on canals and railways.
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Related from TKer:
Mean reversion in the stock market is an ‘optical illusion’ 😵💫
What happened after 1965 when 10 dominant stocks fell behind ☎️🚗🛢️
We’re learning more about who’s winning and losing in the AI revolution 🤖
How do I think of today’s AI craze relative to past bubbles? 🫧🤖🚂🚗
The next couple of years for the job market could be tough 🫤
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
💼 Jobs were lost. According to the BLS’s Employment Situation report released on Friday, U.S. employers shed 92,000 jobs in February. This metric has been negative in five of the last nine months.
Total payroll employment declined to 158.5 million jobs in February, down marginally from a record high.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — rose to 4.4% in February, near the highest level since October 2021.
The labor market clearly isn’t as hot as it used to be.
For more on the labor market, read: About that ugly jobs report 📉 and We’re at an economic tipping point ⚖️
💸 Wage growth picks up. Average hourly earnings rose by 0.4% month-over-month in February. On a year-over-year basis, February’s wages were up 3.8%.
💰 Job switchers still get better pay. According to ADP, annual pay in February for people who changed jobs was up 6.3% from a year ago. That better-pay gap has been cooling a bit in recent months. For those who stayed at their job, pay was up 4.5%, about what it’s been for the past year.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits stood at 213,000 during the week ending Feb. 28, unchanged from the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.868 million during the week ending Feb. 21.
For more on the labor market, read: The next couple of years for the job market could be tough 🫤
💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 2.8 percent in the fourth quarter of 2025 … as output increased 2.6% and hours worked decreased 0.2%. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From fourth quarter 2024 to fourth quarter 2025, nonfarm business sector labor productivity increased 2.8%.”
For more, read: Promising signs for productivity ⚙️ and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
👎 Consumer vibes remain in the dumps. The Conference Board’s Consumer Confidence Index increased 2.2 points in February to 91.2, but continues to trend poorly. From the firm: “The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased by 1.8 points to 120.0 in February. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—rose by 4.8 points to 72.0. The cutoff for preliminary results was February 17, 2026.“
More from the report: “Among demographic groups, confidence on a six-month moving average basis ticked upward in February for consumers under age 35, which continued to be the most optimistic group. Confidence edged down for respondents 35 and older. Relatedly, on a six-month moving average basis, confidence among Generation Z rose, consistent with soundings from the under-age 35 group, but fell among other generations. By income, confidence on a six-month moving average basis continued to dip for most brackets. Consumer confidence by political affiliation revived among Republican and Independent voters in February after a dip in January, while Democrats were less optimistic.”
Relatively weak consumer sentiment readings appear to contradict relatively strong consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We’re taking that vacation whether we like it or not 🛫
⛽️ Gas prices jump. From AAA: “The national average for a gallon of regular gasoline jumped nearly 27 cents since last week to $3.25. The conflict in the Middle East has sent crude oil prices higher to the mid $70/barrel range. The recent increase puts the national average at the same price as it was in early April of 2025. Springtime typically sees higher gas prices as gasoline demand rises and summer-blend gasoline production begins. The last time the national average made a similar weekly jump was back in March of 2022 during the start of the Russia/Ukraine conflict.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🛍️ Retail shopping activity declines. Retail sales in January declined 0.2% to $733.5 billion.
Results were mixed across retail categories.
💳 Card spending data is holding up. From JPMorgan: “As of 27 Feb 2026, our Chase Consumer Card spending data (unadjusted) was 3.1% above the same day last year. Based on the Chase Consumer Card data through 27 Feb 2026, our estimate of the US Census February control measure of retail sales m/m is 0.53%.“
From BofA: “Total card spending per HH was up 1.8% y/y in the week ending Feb 28, according to BAC aggregated credit and debit card data. The late‑Feb y/y spending slowdown was driven by the Northeast, where spending fell sharply amid the second snowstorm. In the week ending Feb 28, y/y spending growth declined the most in transit since the previous week.“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️
🏠 Mortgage rates hold. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.00%, almost flat compared to 5.98% last week: “Mortgage rates held steady at 6% this week, hovering near their lowest level since 2022. In fact, rates are down nearly a full percentage point from this time in 2024, spurring activity from buyers, sellers and owners. As a result, refinance activity is up, and purchase applications are ahead of last year’s pace.”
As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏭 Business investment activity rises. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 0.8% to a record-high $79.24 billion in December.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road.
🔨 Construction spending ticked higher. Construction spending increased 0.3% to an annual rate of $2.168 trillion in December.
While we’re on the subject of construction, the Big Tech hyperscalers have committed a fortune to building massive datacenters to support AI. For more on this, read: Struggling to make sense of Big Tech’s $600 billion bet on AI? Here’s a metric to watch 📋
🤷 Manufacturing activity surveys signal growth, but also caution. From S&P Global’s February U.S. Manufacturing PMI: “February saw US manufacturers report the weakest expansion since last July, in a further sign that the overall pace of economic growth has moderated in recent months. Production growth slowed in response to a near-stalling of orders from customers, with exports falling especially sharply. Factory payroll growth was also barely changed, as concern over order book health caused a growing reticence to add to workforce numbers.”
Similarly, the ISM’s February Manufacturing PMI signaled cooling growth.
🤷 Services activity surveys signal growth, but also caution. From S&P Global’s February U.S. Services PMI: “Slowing demand growth from customers both at home and across export markets has been compounded by adverse weather in many states, resulting in the smallest rise in service sector activity for ten months.”
Meanwhile, the ISM’s February Services PMI signaled accelerating growth.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 2.1% rate in Q1.
For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️
Putting it all together 📋
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, appears to be modestly positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% of the funds beat the index over the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
