Fed rate reduction in September<\/a> and a series of additional cuts arriving later in this year and during 2026. Though the markets now assess the probability of substantial trimming from the current benchmark of 4.3% to 4.5% as a virtual certainty, the prospect hasn\u2019t led to a significant decline in the number that matters most: the 10-year Treasury yield, which determines such essentials as the cost of home and car loans and credit for corporations. That figure is holding steady at around 4.3%, just about where it stood prior to the unveiling of Liberation Day tariffs in early April.<\/p>\nWhy are stocks so high right now?<\/p>\n
That fading backdrop stands at odds with superrich equity valuations. Prices are so extremely stretched that they risk a sharp fall, or at minimum weak gains looking forward. The problem: The S&P 500\u2019s charge is far outpacing the plodding advance in earnings. At the market close on Aug. 14, the big-cap index posted yet another record at 6,469. As of Q1 2025, the last full quarter of reported profits, S&P 500 earnings per share, based on the trailing 12-month results, stood at $216.69. Hence, the S&P price-to-earnings multiple just hit 29.85 (6,469 divided by $216.69)\u2014I\u2019ll round it to 30. By historical standards, it\u2019s a gigantic, even scary figure.<\/p>\n
The $3.30 that investors are garnering for every $100 they dispense on the S&P 500 marks the worst deal since the last, heady days just before the tech craze\u2019s implosion in early 2002. The market P\/E actually did reach just over 30 for five other quarters in the almost quarter-century span, but that\u2019s only the result of extraordinary downturns that crushed the earnings denominator, first during the Global Financial Crisis and again in the COVID crash. Except in those special cases where earnings per share (EPS) collapsed and artificially inflated the multiple, this is the first time the P\/E has reached within a whisker of 30 since what\u2019s renowned as one of the most-unhinged times in the annals of financial markets.<\/p>\n
It\u2019s also cautionary that the P\/E struck 30 only during just one period between 1888, where the data begins, and the start of the dotcom takeoff in 1998. The landmark we\u2019ve just seen repeated occurred in 1929, shortly prior to the wipeout ushering in the Great Depression.<\/p>\n
What\u2019s especially troubling is the way the multiple reached its current heights. The main driver wasn\u2019t what matters most: rising profits. Since the pre-COVID end of 2019, EPS for the S&P 500 increased by 67% or 9% annually, while the index has waxed far faster at 120%, or 14% a year. It\u2019s those divergent, sprint versus jogging performances that hiked the P\/E from 22 to 30.<\/p>\n
Of course, as Warren Buffett likes to note, stocks compete with bonds for investor money, and falling interest rates are great for equities. But in the past couple of years, we\u2019ve seen the opposite scenario. Bond yields have spiked after years in the cellar to something like normal levels, making Treasuries far more attractive today than when the 10-year yielded an average of 2.2% from 2015 to early 2022. Now they\u2019re paying twice that coupon at 4.3%, while the earnings yield on stocks\u2014that $3.30 for every $100 you\u2019re paying\u2014has dwindled.<\/p>\n
Where will the stock market go from here?<\/p>\n
Indeed, an excellent proxy for the future expected returns on equities is that earnings yield, now sitting at 3.3%. Assume the consumer price index (CPI) keeps chugging at 2.5%\u2014meaning companies are lifting their prices and profits at that pace\u2014and you get a total gain of 5.8% a year. The S&P dividend yield accounts for 1.2% of that figure. By the way, that tiny cash payout epitomizes why equities are looking so frothy. Here\u2019s the math, and it\u2019s simple: Even assuming the P\/E holds at today\u2019s 30, you\u2019ll only get that 5.8% (the 3.3% earnings yield plus 2.5% inflation)\u2014just 40% of the sumptuous take since the summer of 2019.<\/p>\n
But what happens if that multiple drifts downward to, say, a still elevated 25 over the next half-decade? In that case, by August of 2030, the shrinkage in the P\/E would completely erase the appreciation driven by earnings growth, plus the dividend\u2019s contribution, and S&P stocks would show no gain at all. You\u2019d lose something like 10% to inflation. The market moonshot has been great for people who believed and stayed invested. Despite assurances from Wall Street banks and TV pundits, the argument for leaning heavily on stocks is a lot flimsier today than before the liftoff, and the appeal of bonds much greater. You never know when gravity will take hold, only that it always does.<\/p>\n","protected":false},"excerpt":{"rendered":"Something doesn\u2019t make sense about the current stock market boom. U.S. big caps keep soaring while the economic…\n","protected":false},"author":2,"featured_media":72708,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[64,63,99,8783,171,56758,32338],"class_list":{"0":"post-72707","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-au","9":"tag-australia","10":"tag-business","11":"tag-investing-advice","12":"tag-markets","13":"tag-stock-advice","14":"tag-stock-prices"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/72707","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=72707"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/72707\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/72708"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=72707"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=72707"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=72707"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}