Bullish and Bloated? Why Stocks Are Flying and What Might Bring Them Back Down
It’s official — the S&P 500 and Dow have wiped out their 2025 losses in dramatic fashion. Just a few weeks ago, markets were bogged down by trade tensions and bearish expectations. Today? They’re buoyed by a wave of strong earnings and an apparent cooling of tariff threats.
But before you start popping champagne, consider this: the market might be getting ahead of itself. The S&P 500’s forward P/E ratio has spiked to 21.5, now well above the five-year average. That means investors are paying a lot more for every dollar of expected earnings — a red flag, especially when earnings estimates are quietly slipping.
In this week’s The Market Pulse, we’ll unpack this bull run and explore its potential limits. Our Main Topic looks at what’s really driving the rally and why valuations could be a trapdoor. In This Week I Learned, we break down why forward P/E ratios matter more than you might think. And in The Fun Corner, we’ll test your knowledge of when “expensive” stocks were actually a good idea.
It’s a great time to enjoy the market momentum, but a better time to understand what’s under the hood. Let’s get to it.
This Week I Learned…
When Expensive Stocks Send a Message
This week I learned that high valuations aren’t always a warning siren, sometimes they’re a sign of confidence.
The forward price-to-earnings ratio, or forward P/E, is one of the most closely watched metrics in investing. It’s calculated by dividing a stock’s (or index’s) current price by projected earnings for the next year. And right now, the S&P 500’s forward P/E is 21.5, which is well above its historical norms.
Now, a high P/E usually means one of two things:
- Investors are irrationally optimistic, a setup for disappointment.
- Investors believe earnings will grow fast, justifying a premium.
So which is it this time?
Some analysts argue this could reflect genuine optimism that a recession is off the table. Yardeni Research points out that P/E ratios usually fall into the single digits during recessions, and we’re nowhere near that. Even in October 2022, during profound economic fear, the ratio only dipped to 15.1.
But here’s the twist: while stock prices are rising, earnings expectations have slipped down from $271.05 to $263.40 for 2025. That divergence is what makes this rally feel precarious.
This week I learned that valuations aren’t just numbers but investor mood rings. And right now, they’re glowing with hope… or hubris. The market will tell us soon which one it is.
The Fun Corner
Overvalued or Just Overconfident?
Trivia Time: What’s the most expensive forward P/E ratio ever recorded for the S&P 500 — and what happened next?
Answer: 46.5 — in March 2000. What followed? The dot-com bust.
But here’s the kicker: right before that crash, investors were convinced tech stocks were immune to gravity. Sound familiar?
Fun Fact: The S&P 500’s average forward P/E over the past 25 years is just under 16.8. We’re now 25% above that level. That doesn’t mean we’re heading for disaster, but it’s a reminder: “expensive” has a history — and a habit of humbling us.
What Could End the Bull Run?
It’s hard to argue with the numbers: the S&P 500 is up 5.3%, the Dow has jumped 3.4%, and the Nasdaq posted its best week in over a month. After weeks of tension, markets have returned to life thanks to robust first-quarter earnings and a temporary truce in the U.S.–China tariff saga.
78% of S&P 500 companies beat EPS estimates, and 62% topped revenue forecasts, showing that corporate America still has muscle. But this rebound comes with a growing contradiction: stock prices are climbing, while earnings forecasts are slipping.
The forward P/E for the S&P 500 now stands at 21.5, well above the five-year average. That means investors are pricing not just resilience but optimism. And that optimism could be misplaced.
Add to this the uptick in Treasury yields, the 10-year has crossed 4.5%, and the 30-year hovers near 5%, and suddenly equities are competing with more attractive fixed-income alternatives. Higher yields also pressure corporate profits and consumer spending, creating a double threat to future earnings.
Meanwhile, tariff risks haven’t vanished. 411 S&P 500 companies mentioned “tariffs” in Q1 earnings calls, a 10-year high. With management teams sounding cautious, Wall Street is revising full-year earnings down.
This rally isn’t irrational, it’s just increasingly fragile. Investors should enjoy the gains but recognize the cracks forming beneath the surface.
The Last Say
When Markets Run Hot and Nervous
Markets can recover quickly. But they can cool just as fast.
This week’s rebound shows how powerful sentiment and earnings can be in reviving the bulls. Yet even a bull needs balance, and right now, there’s a disconnect between price and profit expectations. With forward P/Es climbing and earnings revisions drifting downward, this could be a classic case of markets pricing in too much too soon.
The tension is clear: on one hand, strong earnings and a temporary tariff ceasefire. On the other hand, rising yields, cautious corporate commentary, and valuation pressure. Throw in fragile consumer confidence and retail-sector warnings, and you have a market walking a tightrope.
It’s a good time for investors to stay alert. Celebrate the momentum, but remain grounded in fundamentals. If this rally is to continue, it needs more than hope. It needs proof.
