Markets hold at high valuation

Valuation levels near 30 times earnings raise questions about the sustainability of the rally amid slowing growth and policy risks.

Stocks Near 30 P E Raise Market Risk

As of mid August the S&P 500 closed around 6,469, with trailing twelve month earnings near $216.69 a share, putting the index at a P/E ratio close to 30. Prices have risen faster than profits, a gap that has widened since 2019 when earnings grew about 67 percent while the index climbed roughly 120 percent. The gap suggests buyers are counting on momentum and tech optimism to sustain gains even as fundamentals lag.

The macro backdrop remains uneven. July payrolls added just 73,000 jobs, with May and June figures revised lower, keeping three‑month employment net additions at about 106,000. GDP growth in the first half of 2025 tracked around 1.75 percent, far short of earlier aspirational targets. The Congressional Budget Office warns growth could hover near 1.7–1.8 percent through the next decade, a pace that complicates debt dynamics. Inflation remains a factor with producer prices rising 0.9 percent in June, a move that escalates costs for households and businesses. Tariffs argued by some policy makers as a growth tool are now blamed for higher consumer costs and broader risk to margins, while mortgage rates around 6.7 percent keep housing demand dampened. In financial markets, the expected path of Fed rate cuts has not yet translated into lower long‑term yields, leaving the earnings yield on equities and the yield on Treasuries in tighter competition than many anticipated.

Valuations at or near 30 times earnings are a warning sign that investors should take seriously. The math matters: if earnings fail to keep pace and the P/E remains elevated, even modest shifts in rates or inflation can trigger outsized losses. The current earnings yield around 3.3 percent, plus 2.5 percent inflation, yields roughly 5.8 percent total return—not a dramatic premium for risk in a slow‑growth environment. If the multiple drifts down toward 25 over the next several years, the gains from earnings growth and dividends may be offset by multiple compression, leaving investors with little real upside after inflation.

Beyond the numbers, the market’s resilience hinges on policy signals and the broader economy. Higher bond yields make fixed income a more attractive alternative, limiting the cushion stocks have enjoyed from cheap financing. The rally also leans on sentiment around AI and momentum rather than clear gains in profitability. If profit growth stalls or policy shifts dampen demand, the upside case for stocks weakens and the downside risk grows. In short, the current balance of risk and reward depends on whether earnings catch up with price or prices revert to a more normal valuation. Gravity, history, and the current data all say investors should prepare for a reality check.

Highlights

The coming data will test whether today’s optimism can survive a harsher pricing of risk.