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Are Valuations Expensive?

July 29, 2025

Time to Read: 3 minutes

Last week the S&P 500 reached yet another all-time high. After nearing a 20% decline in April, the index is up over 8% year to date. Its price-to-earnings (PE) ratio, a measure that indicates how much investors are willing to pay for earnings expected over the next 12 months, is now 22x compared to the roughly 17x average set since 1996. The wide discrepancy has led some investors to worry that the equity market has become too expensive.

Our analysis indicates that the technology sector has been a key driver of the above average PE ratios. While this could suggest tech is expensive, net margins, which indicate how efficiently companies convert revenues into actual profits, are 14.4% higher for the technology sector than the S&P 500. This marks the highest difference in history. In addition to better margins, relative valuations of technology stocks versus the S&P 500 are much lower than they were during the dotcom bubble.

Given better margins and lower relative valuations, we believe technology is not overvalued, and therefore neither is the broader market. While current valuations are historically high, we’re in a higher margin regime that is driven by tech. This means the market is better at turning revenue into profits, which helps explain current valuation levels and suggests we could be in a higher PE world. While we anticipate some volatility over the historically challenging August and September period, we remain constructive on equities and maintain our overweight to U.S. large caps.

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Cuts Are Coming

Last Friday, Federal Reserve Chair Jerome Powell described a shift in the balance of employment and inflation risks, and the market rallied on the news. For us, nothing has changed. We have been closely monitoring the labor market and indicators of inflation, and we continue to expect two rate cuts this year.

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Higher Margins Drive Robust Earnings

Second quarter earnings season is winding down. Nearly all companies have reported, and the majority beat expectations as margin estimates continue to rise.

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Earnings Season Wrapping Up on a High Note

Second quarter earnings season is winding down, but earnings are up, and better than expected. Despite some potentially concerning signals from the real economy, including muted job gains, and possible seasonal volatility, we remain constructive on equities. A positive second quarter earnings season strengthens our conviction.

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Mixed Job Market

Last week the market received mixed messages about the condition of the labor market. Nonfarm payrolls came in lower than expected, and the previous two months of data were revised sharply lower. Yet initial jobless claims were also lower, and the unemployment rate remains in range. We believe the U.S. economy can still deliver modest growth this year.

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