Being able to accurately predict the future would be helpful as a Financial advisor, but I don’t have a crystal ball, and I can’t predict the future.
What I DO have, and what I CAN do is use my eyes, resources, and experience to make sense of what’s happening in the market and what may be coming over the next few months.
What’s Around the Corner?
“I have a hard time with these figures feeling like we haven’t been paid a little bit in advance.”
During the third BTWM webinar of the year, held on 8/14 at noon, we discussed the current state of the market, starting by reviewing the J.P. Morgan Guide to the Markets, which offers data-driven insights.
As of 8/19, the S&P 500 is up over 9% in 2025. While this is a solid return when looking at it in a vacuum, data and historical results tell us we’ve been paid in advance for upcoming earnings estimates. One of the most telling pieces of data to support that we’ve been paid ahead is the current P/E ratios.
“We’re paying a premium on tech stocks right now.”
For tech companies in the S&P 500, for example, the forward P/E ratio is 30.2, while the average P/E ratio for a tech company is significantly lower, at 20.4. Investors are currently paying a 60% premium on tech companies in this index. While the potential of AI and predictions of upcoming record earnings are likely leading to investors pushing P/E ratios to historically high levels, we shouldn’t expect investors to continue to pay more for a dollar’s worth of earnings than they ever have.
S&P 500 P/E ratios have been higher than their current levels at one point in time—1999. Before the dot-com bubble burst in 2000, P/E ratios reached a high of 33.4.
So… is history repeating itself?
Is another bubble forming?
A bubble may be forming, but if it is, we’re a long way from that bubble popping. Pullbacks, which are normal in any market, are a different story, but a deeper, more prolonged correction of 20% or larger is not likely. Earnings forecasts are strong enough to avoid what most would consider to be a “bubble bursting.” Since prices are expected to stabilize over time, and P/E ratios should align with historical norms in the near future, we are likely 20-24 months away from an event you could refer to as a bubble bursting.
Just the Start: The Rise of AI
One explanation for the continued rise of tech P/E ratios is the massive opportunity for AI to change what’s possible for American companies. In the Goldman Sachs “Market Pulse,” published in August, AI’s positive potential impact on the economy is discussed at length:
Artificial intelligence (AI) has the potential to be transformative to the economy, to markets, and to businesses. From a macro perspective, Goldman Sachs Global Investment Research sees AI boosting labor productivity by 15% over the next 10 years and adding $7 trillion to global GDP. Roughly two-thirds of US jobs could be complemented by AI, creating opportunities for up-skilling and more human-generated value creation. As AI evolves and expands, we see opportunities across market capitalizations and in both public and private investments. Still, we are cognizant that technological disruption can create winners and losers.
With corporate adoption of AI still under 10%, it’s logical to expect the best and brightest companies in the country to find ways to boost productivity and open up new streams of revenue in the near future.
In addition to the Guide to the Markets, topics discussed in the webinar included:
- What’s to Come in 2025
- The “Big Beautiful Bill” and Its Potential Impact on the Market
- Expectations for What’s to Come
- The Fed and Potential Rate Cuts
- The Tech Sector and Inflated P/E Ratios
- Rebalancing
Time to Rebalance
The S&P 500 is top-heavy. For example, the top 10 stocks in the S&P 500 make up around 40% of the total S&P 500 market cap, which means that if you’re not careful, you could end up with more concentration in one area than what you intended.
“It’s probably a great time to do some rebalancing.”
Being highly concentrated in a bull market isn’t necessarily a bad thing. Still, when we’ve been paid ahead for future earnings, the risk of earnings coming in lower than expected and the rebalancing that would follow could interrupt your short and long-term goals.
When trying to rebalance and limit your exposure to a “bubble bursting,” one place to look is the Fed and what they’re doing with short-term rates. IF, and it’s a big if, rates fall by a full percent over the next 16 months, bond returns could near double digits.
Quotes
- “When rates are falling, that has a positive impact on the bond universe.”
- “It’s hard for me to see us not having higher tax rates in the future.”
- “I’m uncomfortable with valuations, but I don’t see it as a doomsday scenario.”
- “Buckle up, because it probably gets a little bumpier between here and the end of the year.”