A tale of three markets and the dangerous allure of extrapolating temporary trends
In the fast-paced world of finance, yesterday's winner can quickly become tomorrow's laggard. The last three years have provided a masterclass in how recency bias – our tendency to give disproportionate weight to recent events – can lead investors astray. By examining the performance of three major markets (US, China, and India) from 2022 to 2025, we see a compelling case for why objective thinking and focus on business fundamentals matter more than chasing recent trends[1][2][3].
What Is Recency Bias and Why Does It Matter?
Recency bias is a cognitive error where investors place excessive emphasis on recent market movements while ignoring long-term trends and historical context[1][4][5]. This behavioral tendency can cause investors to make irrational decisions – selling during temporary downturns or buying into unsustainable rallies[1][6].
The bias manifests in several ways: investors may exit mutual funds after a few months of poor performance, chase hot sectors that have recently outperformed, or assume that recent market conditions will persist indefinitely[6][7]. As one expert noted, "Recent events are more available in our memory, making them seem more likely to repeat than their actual probability suggests"[4].
The Three-Year Market Cycle: A Study in Recency Bias
2022: The Great Divergence
The year 2022 perfectly illustrates how recency bias can mislead investors. The S&P 500 crashed 19.95% as investors panicked over aggressive Federal Reserve rate hikes and feared a prolonged tech downturn[8][9]. US IT companies reported disappointing earnings, leading markets to assume the slowdown would persist and compress their valuation premiums significantly[8][10].
Meanwhile, China's markets fell 14.95% as COVID-19 lockdowns and regulatory crackdowns continued to weigh on sentiment[11][12]. The prolonged weakness since 2020 had convinced many investors that China was uninvestable, leading to massive foreign capital outflows[12].
India, however, bucked the trend with a modest 2.72% gain. Strong domestic earnings growth and expanding profit margins led investors to extrapolate these trends deep into the future, assuming India's outperformance would continue indefinitely[13][14][15].
2023: The Reversal Nobody Saw Coming
By 2023, the recency bias trap became evident as market leadership completely reversed. The S&P 500 surged 24.73%, led by a remarkable recovery in technology stocks as AI optimism took hold[3][16]. Companies that seemed permanently impaired just months earlier became market darlings again.
China remained weak with a -4.54% decline, reinforcing the narrative that it was a "lost cause" for investors[12]. India continued its strong run with 19.42% gains, further convincing investors that its premium valuations were justified by superior earnings growth[14][15].
2024-2025: The Cycle Completes
The pattern continued in 2024, with the US maintaining momentum (+24.01%) and India moderating (+8.75%) as valuation concerns finally emerged[17][18]. China began showing signs of life (+12.90%) as government stimulus measures took effect[19][20].
Most remarkably, in 2025 year-to-date, China has been the best performer (+9.76%), the US has moderated (+8.03%), and India has significantly underperformed (+3.13%)[2][21][18]. This represents a complete reversal from the trends that seemed so permanent just years earlier.
The Fundamental Reality Behind the Numbers
What makes this story so compelling is that the underlying business fundamentals of these markets didn't change as dramatically as the performance swings suggest.
US Technology Companies: Despite the 2022 crash, many US tech firms maintained strong competitive moats – dominant market positions, network effects, and pricing power[22][23]. Companies like Apple, Microsoft, and Google possessed the very characteristics that make businesses "antifragile" – they emerged stronger from the temporary setback[24][25].
Chinese Markets: While regulatory pressures created short-term headwinds, many Chinese companies continued generating strong cash flows and maintaining competitive advantages[26][27]. The recent turnaround reflects the underlying strength that patient investors could have recognized[20].
Indian Companies: The earnings growth that drove India's outperformance was largely margin-driven rather than volume-driven, making it less sustainable than investors assumed[13][17][18]. When this became apparent, the market corrected accordingly.
The Antifragile Advantage: Why Moats Matter More Than Momentum
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