Chart of the Week

Not in a bubble

August 18, 2026

Time to Read: 3 mins

As the S&P 500 approaches all-time highs, there are renewed concerns among investors about elevated valuations. However, historically strong profitability and expected earnings growth appear to support current pricing. In addition, the current S&P 500 price-to-earnings (P/E) ratio is roughly equal to the average since Covid. As a result, we do not view U.S. equities as being in bubble territory and we remain constructive on the asset class.

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U.S. equity investors are understandably encouraged to see the S&P 500 back near all-time highs, but rising stock prices have also revived concerns that the market may be overvalued.

At roughly 20.2x forward earnings, the S&P 500’s valuation is broadly in line with its average since 2020, even if it remains above pre-Covid norms. Importantly, profitability is also stronger than in prior periods. Net margins are well above their long-term historical averages, likely reflecting improved operating efficiency and resilient business models. As a result, we believe higher margins justify the level of current P/E ratios when compared to history. Consensus earnings expectations are also robust, with growth projected at 31% this year and 13% in 2027 — both well above long-term historical averages.

Given these factors, we believe the market’s current P/E multiple appears reasonable. Therefore, we do not view U.S. equities as being in bubble territory, and we remain constructive on the asset class.

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Is the market rally broadening?

Stocks, as measured by the S&P 500, are up over 13% through early August. The solid gains have been fueled by a resilient economy, steady consumer spending, optimism around artificial intelligence and better-than-expected earnings growth. Still, some investors worry the advance may be too concentrated in technology and that AI-capex monetization may fall short of expectations. A closer look suggests that it is not just tech moving the market higher.

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Fed friction?

Markets are navigating tensions between a Fed that offers less guidance and an inflation backdrop that remains sticky. Added uncertainty from Middle East tensions and energy-price swings is further shaping sentiment, with recent moves in Treasury yields suggesting the market wants the Fed to hike. However, with yield volatility expected to linger in the near term, we see today’s elevated Treasury yields as an especially compelling opportunity in fixed income.

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Muni yields are attractive

The war in Iran has increased volatility across fixed income markets, pushing municipal bond yields higher as investors reassess inflation risk, energy costs and the path of Federal Reserve policy. Even so, historically elevated municipal bond yields present a compelling opportunity for tax-sensitive investors.

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Sizing up small caps

Small caps have outperformed this year despite the threat of higher interest rates, suggesting the rally is being driven by more than just diversification away from large cap tech stocks. Improving earnings expectations and a resilient U.S. economy support our view that small caps have further upside from here.