Michael Arone, chief investment strategist at State Street, told an audience at the Top Advisor Summit in Las Vegas that the bullish case for equities still outweighs the risks even as prices sit at historically high valuations. State Street, which has surpassed $5 trillion in assets under management, is signaling a cautious tilt toward risk on the premise that three macro forces—modest economic cooling, disinflation and a Federal Reserve moving toward neutral—could support continued gains.

Arone encapsulated that view succinctly: “The economy is cooling modestly, inflation is heading in the right direction and Fed policy is moving toward neutral.” He also told attendees he expects the Federal Reserve to cut rates at every meeting through year-end, with as many as two additional cuts in 2026. He argued that current policy settings are still restrictive, saying “Policy has been too restrictive at 4.25% to 4.5%,” and suggested the central bank “They’ve got room to ease without reigniting [...]” inflationary pressures.

The strategist’s optimism rests on a combination of monetary easing, potential fiscal stimulus and what he described as surging corporate profits—factors that can sustain multiples even as absolute valuations look lofty. But Arone repeatedly warned that those lofty valuations create “a small margin for error,” a phrase he used to underscore the vulnerability of markets to shocks. That calculus matters for institutional investors and financial advisors who rely on large-cap benchmark exposures and are sensitive to shifts in rate expectations.

Market implications of the scenario Arone lays out are straightforward. If the Fed follows through with a sequence of cuts, bond yields would likely decline, lowering discount rates and supporting equity valuations. Lower rates could also reinvigorate investment in rate-sensitive sectors, including real estate and technology, and prompt re-risking among yield-seeking institutional portfolios. Conversely, any surprise uptick in inflation or unexpected economic weakness could flip investor sentiment quickly, producing sharp downside given limited valuation buffers.

From a policy perspective, Arone’s forecast bets on central bankers’ confidence in disinflationary progress and their willingness to loosen policy without destabilizing price expectations. That judgement will hinge on incoming inflation data, wage trends and labor market resilience—variables the Fed monitors closely. If inflationary signals reaccelerate, the room to ease that Arone describes would narrow, intensifying the risk of a policy U-turn.

For long-term investors, the message is dual: the macro backdrop could allow the bull market to extend into 2026, but the path will be uneven and fragile. With State Street’s scale and the strategist’s influence, portfolio allocations and advisory guidance may tilt modestly toward risk while emphasizing active management and vigilance as the margin for error tightens.