U.S. stocks make a comeback, with the S&P 500 and Dow Jones industrial averages removing losses for last week's 2025. But behind this optimism is one of the old problems in the market: stocks are expensive again.
In just a few weeks, investors gathered from trimming risky assets to pursuing good first-quarter earnings and relief rallies to alleviate trade tensions between the U.S. and some of its major trading partners. As a result, stocks are back to expensive, which raises questions about how far the rally can actually go from here.
The forward price (P/E) multiple of the S&P 500 S&P SPX is estimated by dividing its current price by Wall Street analysts' consensus estimate for earnings per share (EPS) over the next 12 months, with the highest level of 28.02 as of April 8, at 18.02 as of April 8, and the highest level of 28.02 as of 28.02. data.
U.S. stocks ended a strong week on Wall Street on Friday as investors breathed a sign of relief after officials in Washington and Beijing reached a 90-day moratorium on tariffs that simplified fears that escalating global trade tensions could hurt the world’s two largest economies. In addition, a batch of inflation data that exceeded expectations also shows that at least for now, tariff policies have not increased price pressure on the U.S. economic prices.
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The S&P 500 rose 5.3% last week while the Dow Jones jumped 3.4%, both indexes returned to positive territory of the year, sealing a stunning comeback in a month after they recently dropped to their recent lows in President Donald Trump’s aggressive and leading tax deduction program. According to Dow Jones Market Data, the Nasdaq technology-heavy Nasdaq Comprehensive Competition also won its best week on April 11.
“Most of the gatherings are shortened by hedge funds and institutions that are very convinced that the economy is in trouble and the market is declining,” said Andrew Slimmon, senior portfolio manager at Applied Equity Advisors and Morgan Stanley Investment Management. But in fact, stable first-quarter earnings for U.S. companies show that “regressive fundamentals are not validated,” he told MarketWatch in a telephone interview.
Indeed, 92% of the S&P 500 companies released quarterly results as of Friday, with 78% yielding positive, and 62% of them having a surprising revenue. According to FactSet data, mixed annual earnings growth in the first quarter was 13.6%, marking the second quarter of double-digit earnings growth reported by large benchmark indexes.
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Despite the widespread first-quarter yields, Wall Street analysts still seem to say about the uncertainty and pessimistic call from company management at the meeting about how Trump’s tariff policy squeezes company profit margins.
Of all companies that have conducted earnings call in the past month, 411 quoted the term “tariff” or “tariff” in their first-quarter calls. This marks the highest number of tariffs issued by S&P 500 companies on quarterly earnings calls in the past 10 years, according to Factset data.
As a result, full-year earnings expectations for the S&P 500 have been shortened over the past month, and Wall Street is now seeing a consensus EPS estimate of about $263.40 for 2025, down from $271.05 in mid-March.
See the problem here? The increase in the forward-earnings P/E ratio and the relegation to the S&P 500 earnings expectations indicate that stock prices are getting higher and higher.
Plus the focus is on tensions between stocks and U.S. government debt, as Treasury yields received a 10-year tax rate BX:TMUBMUSD10Y on Monday, losing its 4.5% level for the first time since February. 30-year bond BX: TMUBMUSD30Y's yield also hovers below 5%, potentially damaging the stock market's returns.
Despite a slight decline from those levels on Friday, the 10- and 30-year yields remained above 6 basis points last week. This is the largest weekly rate of return since April 11, according to Dow Jones Jones market data.
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But, according to Yardeni Research, the overvaluation of the S&P 500 index may also indicate that the U.S. economy is expected to avoid recession, according to Yardeni Research.
“Usually in a recession, the forward p/e of the S&P 500 falls under unit numbers. This is not done this time because the stock market is not priced in the recession. Nor is the industry analyst, according to their latest EPS estimates.”
They said: "In the last bear market, the pre-p/e rate was 15.1 on October 22, 2022. This is also a relatively high p/e and it happened because the most anticipated recession of all times is an unrepresented," they said. “History may have been repeated so far in the stock market and the economy.”
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Another way to assess economic health is through the lens of consumer strength. Last week, retail giant Walmart Inc.'s WMT quarterly results beat Wall Street estimates for every key metric, but the company will still raise prices because they say they can't absorb all the pressure "below the reality of narrow retail margins."
“Consumer pressure and consumers have been in a very difficult period of inflation,” said Marta Norton, chief investment strategist at Empower. “There is enough recognition for consumers and companies need to price cautiously.”
This has earned some of the key marketing activities of other major retailers this week in a quiet calendar for economic data. Home Depot Inc. HD will report its quarterly results Tuesday before the opening bell, followed by Lowe's Companies, Low and Target Corporation TGT, Wednesday morning.
It is worth noting that some consumer stocks (like large technologies) have already traded at fairly high levels. According to FactSet data, the S&P 500's consumer staple Sectorxx: SP500.30 is one of the best performers in the 11 fields of the large index index, while the S&P 500 has 1.3% annually.
"Investors looking for defense in these areas may find that these types of consumers have a small level of security," Norton told MarketWatch on the phone Thursday. "This doesn't mean they won't do well if the market crashes, but I'm less enthusiastic about their future given where their valuations are."