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Market Analysis: S&P 500 Index Needs Significant Earnings Growth or Fed Rate Cut to Justify High Levels
Summary: Contrary to expectations, US stocks have been rising in 2025, nearing historical highs. However, as the S&P 500 Index climbs higher, concerns about its valuation multiples becoming frothy grow stronger. Data shows that the index's price-to-earnings ratio, based on expected profits for the next 12 months, is 22 times, 35% higher than the long-term average. ...
Contrary to expectations, US stocks have been rising in 2025, nearing historical highs. However, as the S&P 500 Index climbs higher, concerns about its valuation multiples becoming frothy grow stronger. Data shows that the index's price-to-earnings ratio, based on expected profits for the next 12 months, is 22 times, 35% higher than the long-term average. Among 20 such valuation indicators tracked by Bank of America strategists, the index shows overvaluation on every single one. Kevin Gordon, Senior Investment Strategist at Jiaxin Wealth Management, said, 'The current market levels are sustainable, but we cannot have high confidence in the 'starting from here' issue. Optimistic earnings expectations for the second half of the year may be too high, coupled with multiples nearing cycle highs, which would require earnings to exceed expectations.' In addition to earnings growth, strategists also noted that a significant rate cut by the Fed would be another way to narrow the gap between fundamentals and market prices for the index.
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Link: Market Analysis: S&P 500 Index Needs Significant Earnings Growth or Fed Rate Cut to Justify High Levels [Copy]
