Something does not make sense of the current stock market boom. Large caps continue to skyrocket while the economic prospects are getting worse. Currently, atmospheres, the great momentum and the Euphoria, are gaining the flow of negative news and the intimidating market measures. But sooner or later, the fundamentals will take matters into their own hands, then pay attention to the flying glass.
On the macro scene, danger panels are increasing. The latest employment report of the Bureau of Labor Statistics revealed that the United States added a meager 73,000 jobs in July, and revised the figures for May and June radically downwards, which has made total net hires in the last three months to only 106,000, less than a fourth increase in the same period last year. Heather Long, chief economist of Navy Federal Credit Union, described the low data as a “game changer” showing that “the labor market is quickly deteriorating”.
GDP growth has also proven to be disappointing, ending well below the highly ambitious objective of the Trump administration by 3%. The economy extended to an annualized clip of only 1.75% in the first half of 2025, down compared to the average of 2.7% in the T3 and the fourth quarter of last year. The Congressional Budget Office (CBO) provides for lukewarm expansion from 1.7% to 1.8% from 2026 to 2035, not fast enough to reduce the federal debt that the agency will project 100% of national income this year to 110% by 2031.
On the inflation front, it seems that Trump’s prices are finally starting to bite. The price index of producers of the Labor Department jumped 0.9% in June, the highest increase of almost three years. We do not know if Trump’s rights cause an increase, but at least they represent an increase in the giant tax. The Tax Foundation provides that the assault will cost consumers and businesses around $ 200 billion per year, the equivalent of around 6% of the total of Washington collected last year in all personal and corporate income samples, evaluating the greatest success since 1993. On average, Americans will be other people with an additional 1.4%, leaving the least dollars for everyone. The CBO considers Trump prices as a growth depressant that its director recently declared that the congress “would reduce the size of the American economy” in the future.
The full force of this effective national sales tax is underway. A parade of companies, including Walmart, Target, Nintendo, Ford and GM, said that although they swallow part of the tariff costs, they are already starting to transmit part of the burden to consumers, and their narrow margins will impose larger increases to come.
The residential real estate market, for sales and construction, remains blocked by a combination of record prices for housing and mortgage rates oscillating about 6.7%, twice the cost three and a half years ago. Young families confronted with affordability may be forced to continue to rent and give up property much longer than in previous generations. This blockage undermines a central power to the prosperity of the country.
The Head of Hope for Bulers Investors: a reduction in the rates of the Fed in September and a series of additional cups arriving later during this year and in 2026. Although the markets now assess the probability of substantial reduction compared to the current reference of 4.3% to 4.5% as virtual certainty, the prospect has not led to a significant decline in the number of people For 10 -year services. This figure stands stable at around 4.3%, roughly where it was before the unveiling of the Liberation Day tariffs in early April.
This off -peak backdrop is in disagreement with the Superrich actions assessments. The prices are so extremely extended that they risk a strong fall, or at minimum low gains, looking forward to. The problem: the costs of the S&P 500 far exceed the progression of the mouth in income. At the closing of the market on August 14, the large capitalization index displayed another record at 6,469. In the first quarter of 2025, the last complete quarter of the declared profits, the profit by action of S&P 500, on the basis of the 12 -month results, amounted to $ 216.69. Consequently, the price of the S&P is multiple has reached 29.85 (6,469 divided by $ 216.69) – I will get around it at 30. According to historical standards, it is a gigantic and even frightening figure.
The $ 3.30 that investors earn for each $ 100 that they distribute on the S&P 500 concluded the worst business since the last exhilarating days just before the implosion of technological enthusiasm at the beginning of 2002. Accident. Except in particular cases where the profit by action (EPS) collapsed and has artificially inflated the multiple, it is the first time that the P / E has reached a derivation of 30 since what is renamed as one of the most deemed moments heard in the annals of the financial markets.
It is also cautious that the P / E hit 30 only for a single period between 1888, when the data started, and the start of Dotcom takeoff in 1998. The benchmark that we have just seen repeated in 1929, shortly before the effusion of the effusion of the great depression.
What is particularly disturbing is the way in which multiple has reached its current heights. The main driver was not what matters most: increased profits. Since the end of the end of 2019, BPA for S&P 500 has increased by 67% or 9% per year, while the index has developed much faster to 120%, or 14% per year. It was these divergent performances, sprint against jogging that have traveled the P / E from 22 to 30.
Of course, as Warren Buffett likes to note, shares are in competition with the obligations for investor money and the drop in interest rates is ideal for shares. But in the past two years, we have seen the opposite scenario. Bond yields have increased after years in the cellar to something like normal levels, which makes treasury bills much more attractive today than when the 10 years gave an average of 2.2% of 2015 at the start of 2022. Now they pay this coupon twice at 4.3%, while the profits give shares – $ 3.30 for each $ 100 you pay – was flexible.
Indeed, an excellent proxy for future expenses expected on the shares is that the return on profits, now at 3.3%. Suppose that the consumer price index (IPC) continues to go to 2.5% – design companies increase their prices and profits at this rate – and you get a total gain of 5.8% per year. The Dividend S&P performance represents 1.2% of this figure. By the way, this small cash payment embodies why the actions seem so frothy. Here are the mathematics, and it’s simple: even assuming that the P / E is 30 today, you will only get 5.8% (the yield of profits of 3.3% plus 2.5% of inflation) – just 40% of the sumptuous taken since summer 2019.
But what happens if this multiple derives down to, say, an even higher during the next half-decade? In this case, by August 2030, the withdrawal of the P / E would completely erase the assessment motivated by the growth of profits, as well as the contribution of the dividend, and the S&P actions would show no gain. You would lose something like 10% in inflation. The Market Moonshot was excellent for people who believed and remain invested. Despite the insurance of banks of Wall Street and television experts, the argument to rely strongly on the actions is much more fragile today than before takeoff, and the attractiveness of bonds much greater. You never know when gravity will settle down, only that is always the case.
This story was initially presented on Fortune.com
