Market Update: Strong Momentum Meets Valuation Headwinds
- David J. Blount, CFP®
- 20 minutes ago
- 2 min read
Good Afternoon.
The S&P 500 continues its impressive run, posting an 18.38% gain year-to-date, following 26.29% in 2023 and 25.02% in 2024.1 This marks only the second time in history the index has delivered three consecutive years of 20%+ returns — a feat last seen during the dot-com boom of the late 1990s.
Valuations: Elevated Across Multiple Metrics
While market momentum remains strong, we are increasingly cautious about current valuation levels. The S&P 500’s trailing P/E ratio sits near 27, well above its long-term average of 16. But it’s not just P/E:
Price-to-Sales ratios are near record highs.
Forward P/E multiples are elevated despite optimistic earnings projections.
CAPE (cyclically adjusted P/E) is approaching levels last seen in 2000.
Historically, when valuations reach these levels, forward 5–10 year returns tend to be significantly lower, often in the mid-single digits or worse. Elevated valuations compress future returns, even if earnings growth remains positive. Please see the charts from JP Morgan below:
Earnings Growth: Still Strong—for Now
Q3 2025 marked the fourth consecutive quarter of double-digit earnings growth, with a blended rate of 10.7%. Roughly 83% of companies beat earnings estimates, and 79% exceeded revenue forecasts, led by tech and AI-driven sectors. Analysts expect 15% growth for the full year, which helps support current prices, but the margin for error is shrinking.
Historical Perspective
Periods of strong multi-year returns combined with high valuations have historically led to muted or negative performance in the following year. For example:
After the 1997–1999 rally, the S&P 500 fell –9% in 2000.
After the 2019–2021 surge, the index dropped –18% in 2022.
While not every elevated valuation leads to a correction, the probability increases when earnings growth slows or macro conditions tighten.
What this Means for You
We remain committed to helping you navigate this environment with discipline and clarity. While we don’t advocate market timing, we do believe valuation-aware investing is essential. This means:
Maintaining diversified exposure across sectors and asset classes.2
Rebalancing portfolios to manage risk especially if you retire or have other major life events in the next 1-3 years.3
Staying focused on long-term goals rather than short-term market moves.
Adding some protected investment strategies to your portfolio.
Taking some gains from the last three years and allocating those to less risky investments.
As always, we’re here to guide you through both opportunity and uncertainty.
Warm Regards,
1. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly. (102-LPL)
2. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. (26-LPL)
3. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. (28-LPL)