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Bubble or Is This Market Different?

October 21, 2025

Time to Read: 2 minutes

The S&P 500 is up 14% year to date after gaining more than 20% annually over the past couple of years. Valuations are certainly elevated, but we believe the market is in a new world where higher multiples are normal rather than stretched.

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The S&P 500 is up 14% year to date after gaining more than 20% annually over the past couple of years. Some investors are speculating that we are amidst another tech bubble because technology companies have been leading the market higher. However, we believe the market is in a new world where higher multiples are normal rather than a sign of stretched valuations.

For some context, the S&P 500’s 12-month future price-to-earnings (PE) ratio is currently 22.4x, notably greater than the 16.8x average since 1996. While the index appears expensive relative to history, we believe this higher-multiple environment is justified. A key reason is the improved profitability of the market; net margins are 1.6x higher at 14% compared to the dot.com era. Similarly, free cash flow margins are 1.9x higher at 11%. In addition, the weight of the technology sector, which has the highest PE, has increased 1.6x since the dot.com era to 35% of the index. This naturally increases the PE of the index.

The changing market structure with the increased size of tech and the broader index’s higher profitability have led to higher PEs compared to long-term averages. In our view, the disconnect between current valuations and historical averages reflects a different type of market – not an overvalued one.

So, while we don’t believe the market is in a bubble, we believe that investors’ skepticism is healthy for keeping bull markets intact. Current valuations could consolidate from elevated levels, but we remain constructive on the forward outlook given improving earnings.

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Resilient Through Uncertainty

U.S. policy uncertainty has remained elevated and consumer sentiment has weakened. Even so, the economy has stayed resilient, and because growth has held up better than sentiment and headlines suggest, we continue to forecast 2% U.S. growth in 2026, in line with trend.

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Despite persistent concerns that sticky inflation would erode purchasing power and drag consumer spending lower, the May retail sales data tells a different story. Spending is up not just in dollar terms, but in quantity, highlighting continued consumer resilience.

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Higher Inflation, Contained Expectations

Inflation has jumped since the Strait of Hormuz closed, squeezing consumers through higher gas and utility bills and pressuring businesses with higher freight and operating costs. Yet, longer-term inflation expectations remain contained, suggesting this looks more like a temporary energy shock than a lasting inflation upswing.

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