Stock Market Valuations

Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

• DJIA 52-wk: +13.10% | YTD: +11.80% | Wkly: +0.75%
• S&P 500 52-wk: +19.40% | YTD: +16.30% | Wkly: +0.71%
• NASDAQ 52-wk: +30.07% | YTD: +22.86% | Wkly: +2.24%
• Consumer Staples ETF 52-wk: -4.83% | YTD: -2.96% | Wkly: -3.55%

Market Movement & Highlights

• At the start of the week, the major indexes reached record highs: the S&P 500 rose about 1.2% on Monday (Oct 27), the Dow Jones Industrial Average climbed ~0.7%, and the Nasdaq Composite jumped ~1.9%. AP News
• The rally was bolstered by softer-than-expected inflation data and optimism around U.S.–China trade talks. Reuters
• Investor sentiment was particularly strong as markets anticipated a policy move from the Federal Reserve (possibly a rate cut) and strong earnings from tech-giants. TipRanks+1

Key Drivers & Themes

Trade & Geopolitics

• Hopes for easing U.S.–China trade tensions contributed to risk appetite, supporting equities. Kiplinger+1

Inflation & Fed Outlook

• The expectation of future Fed rate cuts (thanks to softer inflation signals) provided fuel for the rally. Investopedia+1

Sector Performance

• Technology stocks and large-cap growth names led the charge. Some analysts flagged the strong earnings outlook for megacaps. MarketWatch

Technical / Sentiment

• With the indexes at new highs, some caution remains (valuations are elevated). Still, the near-term tone is positive.

Risks & Things to Monitor

• Although markets are strong, economists note the week includes a “double whammy” of the Fed decision and major tech earnings, so any surprise (hawkish policy, weak earnings) could spur a pullback. MarketWatch
• Data delays (due to the government shutdown) remain a wildcard — less transparency means more uncertainty.
• Trade talks could stall or disappoint, which might dampen sentiment quickly.

Valuation & Earnings:

Tied to the economic and interest rate outlook is the question of stock market valuation that still looks reasonable given the expected interest rate trajectory. The S&P 500 index is currently trading at 23.5X next year’s earnings estimates, up from 18.7X at the April 2025 bottom and 15.4X at the end of September 2022. This is close to the 10-year high multiple for the market, which is feeding the ‘AI bubble’ narrative in parts of the market. We should keep in mind that the index peaked at 26X at year-end 1999 in the Tech bubble.

A Winning Week for Stocks Masks Trouble Below the Surface:

Markets ended the week on a positive note, but don’t be fooled: Jitters are emerging below the surface, setting up a potentially rocky path for the rest of 2025 and next year.

Yes, the S&P 500 index SPX +0.26%, Nasdaq Composite COMP +0.61%, and Dow Jones Industrial Average DJIA +0.09% were on track to gain 0.5%, 1.9%, and 0.5%, respectively. But volatility picked up, and some big-name stocks got punished as investors questioned their earnings reports.

Tech came close to spoiling the party as the industry signaled much more spending on artificial intelligence. Meta Platforms META -2.72%, margins dropped in the third quarter as it aggressively ramped up outlays, including on AI, sending its stock down 11% after reporting earnings. Microsoft MSFT -1.51% also announced hefty capital investment plans for AI, pressuring its stock despite strong quarterly results.

Amazon.com was a standout, bucking the downturn after beating estimates across all segments. Apple, spending less on AI, also soothed nerves with better-than-expected earnings and an aggressive growth forecast for the fourth quarter.

A slowdown in AI-related spending will come, but the big spenders—Meta, Amazon, Microsoft, Alphabet, and Oracle —say they’re still planning double-digit percentage increases in the near term. They’ll report their fourth quarters in late January and early February, providing a reprieve from bubble concerns at least until then.

If there is trouble ahead, it’s “probably more quarters than months” away, says AllianceBernstein economist Eric Winograd.

Tech companies aren’t the only ones spooking the market. Chipotle Mexican Grill dropped 18% after cutting its full-year forecast for same-store sales. Also hit hard were health insurer Cigna and financial-technology company Fiserv, the latter losing more than 40% of its market value after issuing a drastically reduced outlook.

Part of the problem may simply be market fatigue after a stellar bull run. Steep expectations for earnings beats create a setup for disappointment if companies fall even slightly short.

Even good deeds aren’t going unpunished: Consumer discretionary companies’ earnings have beaten expectations by 14% on average, but their stocks still dropped 2% the trading day after reporting, according to Evercore ISI. Energy is similarly under pressure, down 2% in October even though companies beat earnings estimates by 11% on average, according to Fundstrat.

Another pressing risk is the Federal Reserve’s plans for interest rate cuts. The rate of inflation, at around 3%, remains above the Fed’s target. Chair Jerome Powell indicated in his Wednesday news conference that a December cut isn’t a shoo-in, partly because of a lack of economic data during the government shutdown.

Powell emphasized that the Fed will operate cautiously. But the market would almost certainly slump if the Fed doesn’t cut in December, leaving rates higher than expected next year and putting the economy at greater risk of a recession.

“If we start seeing layoffs throughout the economy, that will signal a recession is possible, maybe even probable,” says Winograd.

Expect modest gains for the rest of the year—or a selloff if the Fed doesn’t come through in December. The S&P 500 is trading 13% above its 200-day moving average, a technical sign that it’s overextended. The market traded 9% above that average in early 2022 when it peaked—and then dropped 25%—as the Fed surprised the market with rate hikes.

Playing defense has been a sure way to underperform in a stock market that only seems to reward offense. That may be about to change.

It feels like defensive stocks—think consumer staples, real estate investment trusts, dividend payers, and other steady sectors—should be doing well right now. Job growth slowed down in recent months, and the dearth of data because of the government shutdown means it’s difficult to know what is happening in the U.S. economy. Toss in concerns about trade, a sluggish manufacturing sector, and worries about an artificial-intelligence bubble, and safety seems like it should be in style.

That couldn’t be further from reality. The Consumer Staples Select Sector SPDR exchange-traded fund, home to the likes of Walmart, Coca-Cola, and Procter & Gamble, has returned 1.7% this year, including reinvested dividends, badly underperforming the S&P 500’s 18% gain. The Health Care Select Sector SPDR ETF has returned just 7.1%, while the Real Estate Select Sector SPDR ETF is up only 5.1%.

This underperformance could attract buyers soon. The ratio of stock prices for a basket of defensive names versus prices for a basket of economically sensitive ones is near its lowest since at least 2013, according to Evercore ISI strategist Julian Emanuel, which seems odd given that the Institute for Supply Management’s manufacturing remains below 50, a level that suggests the industrial economy remains sluggish. It’s the kind of environment that should favor defense. The AI boom has ensured it hasn’t, yet defensives should eventually see a catch-up trade.

Early signs of the catch-up trade have already emerged. Flows into defensive equity funds in developed markets in the week ended Oct. 24 hit their highest levels since April, when President Donald Trump’s initial tariff announcement caused the market to fret over the economy.

This could foreshadow better days to come for defensive stocks.

Sometimes, defense is the best offense.

Key Risks & Watch-Outs

• Missed or weak earnings/guidance: a major hiccup from a big name could dent broad market optimism.
• Inflation/interest reversal: if inflation creeps up, or the Fed signals fewer cuts or even hikes, valuations could suffer.
• Valuation fatigue: with many stocks near all-time highs, patience may be required if the market pauses or consolidates.
• Data blackout / delayed economic releases: Less transparency (e.g., due to shutdowns) means markets may react more strongly to surprises.
• Geopolitical or trade shocks: Unexpected trade policy announcements or global conflict could spook markets quickly.

Getting a little scary at these levels. But November and December are usually strong months. I’m playing it close to the vest.

— Richie

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