Something doesn’t make sense about the current stock market boom. U.S. big caps keep soaring while the economic outlook keeps getting worse. Right now, the atmospherics, Big Momentum and AI euphoria, are winning over the negative news flow and daunting market metrics. But sooner or later the fundamentals will take charge, and then, watch out for flying glass.
On the macro scene, the danger signs are multiplying. The latest employment report from the Bureau of Labor Statistics disclosed that the U.S. added a meager 73,000 jobs in July, and revised the May and June figures radically downward, bringing total net hires for the past three months to just 106,000, less than one fourth the increase for the same period last year. Heather Long, chief economist at Navy Federal Credit Union, described the feeble data as a “game changer” demonstrating that “the labor market is deteriorating quickly.”
GDP growth has also proved disappointing, clocking far below the Trump administration’s highly aspirational target of 3%. The economy expanded at an annualized clip of just 1.75% through the first half of 2025, way down from the 2.7% average in Q3 and Q4 of last year. The Congressional Budget Office (CBO) is forecasting tepid expansion of 1.7% to 1.8% from 2026 to 2035, not nearly fast enough to shrink the federal debt that the agency projects will swell from 100% of national income this year to 110% by 2031.
On the inflation front, it appears that the Trump tariffs are finally starting to bite. The Labor Department’s producer price index surged 0.9% in June, the largest increase in almost three years. It’s unclear if the Trump duties are causing the surge, but at the least they amount to a giant tax increase. The Tax Foundation projects that the onslaught will cost consumers and companies roughly $200 billion annually, the equivalent of around 6% of the total Washington collected last year in all personal and corporate income levies, amounting to the biggest hit since 1993. On average, Americans will be spending an extra 1.4% of their after-tax incomes on toys, apparel, autos, and other heavily taxed imports, leaving fewer dollars for everything else. The CBO views the Trump tariffs as a growth-depressant that its director recently told Congress will “reduce the size of the U.S. economy” going forward.
The full force of that effective national sales tax is building. A parade of companies including Walmart, Target, Nintendo, Ford, and GM have stated that though they’re swallowing part of the tariff costs, they’re already starting to pass a portion of the burden to consumers, and their narrow margins will mandate bigger increases to come.
The residential real estate market, for both sales and construction, remains stymied by a combination of record housing prices and mortgage rates hovering at roughly 6.7%, twice the cost three and a half years ago. Young families facing the affordability chasm may be forced to keep renting and forgo ownership much longer than in previous generations. That gridlock is sapping a powerhouse central to the nation’s prosperity.
The chief hope for bullish investors: a Fed rate reduction in September and a series of additional cuts arriving later in this year and during 2026. Though the markets now assess the probability of substantial trimming from the current benchmark of 4.3% to 4.5% as a virtual certainty, the prospect hasn’t led to a significant decline in the number that matters most: the 10-year Treasury yield, which determines such essentials as the cost of home and car loans and credit for corporations. That figure is holding steady at around 4.3%, just about where it stood prior to the unveiling of Liberation Day tariffs in early April.
That fading backdrop stands at odds with superrich equity valuations. Prices are so extremely stretched that they risk a sharp fall, or at minimum weak gains looking forward. The problem: The S&P 500’s charge is far outpacing the plodding advance in earnings. At the market close on Aug. 14, the big-cap index posted yet another record at 6,469. As of Q1 2025, the last full quarter of reported profits, S&P 500 earnings per share, based on the trailing 12-month results, stood at $216.69. Hence, the S&P price-to-earnings multiple just hit 29.85 (6,469 divided by $216.69)—I’ll round it to 30. By historical standards, it’s a gigantic, even scary figure.
The $3.30 that investors are garnering for every $100 they dispense on the S&P 500 marks the worst deal since the last, heady days just before the tech craze’s implosion in early 2002. The market P/E actually did reach just over 30 for five other quarters in the almost quarter-century span, but that’s only the result of extraordinary downturns that crushed the earnings denominator, first during the Global Financial Crisis and again in the COVID crash. Except in those special cases where earnings per share (EPS) collapsed and artificially inflated the multiple, this is the first time the P/E has reached within a whisker of 30 since what’s renowned as one of the most-unhinged times in the annals of financial markets.
It’s also cautionary that the P/E struck 30 only during just one period between 1888, where the data begins, and the start of the dotcom takeoff in 1998. The landmark we’ve just seen repeated occurred in 1929, shortly prior to the wipeout ushering in the Great Depression.
What’s especially troubling is the way the multiple reached its current heights. The main driver wasn’t what matters most: rising profits. Since the pre-COVID end of 2019, EPS for the S&P 500 increased by 67% or 9% annually, while the index has waxed far faster at 120%, or 14% a year. It’s those divergent, sprint versus jogging performances that hiked the P/E from 22 to 30.
Of course, as Warren Buffett likes to note, stocks compete with bonds for investor money, and falling interest rates are great for equities. But in the past couple of years, we’ve seen the opposite scenario. Bond yields have spiked after years in the cellar to something like normal levels, making Treasuries far more attractive today than when the 10-year yielded an average of 2.2% from 2015 to early 2022. Now they’re paying twice that coupon at 4.3%, while the earnings yield on stocks—that $3.30 for every $100 you’re paying—has dwindled.
Indeed, an excellent proxy for the future expected returns on equities is that earnings yield, now sitting at 3.3%. Assume the consumer price index (CPI) keeps chugging at 2.5%—meaning companies are lifting their prices and profits at that pace—and you get a total gain of 5.8% a year. The S&P dividend yield accounts for 1.2% of that figure. By the way, that tiny cash payout epitomizes why equities are looking so frothy. Here’s the math, and it’s simple: Even assuming the P/E holds at today’s 30, you’ll only get that 5.8% (the 3.3% earnings yield plus 2.5% inflation)—just 40% of the sumptuous take since the summer of 2019.
But what happens if that multiple drifts downward to, say, a still elevated 25 over the next half-decade? In that case, by August of 2030, the shrinkage in the P/E would completely erase the appreciation driven by earnings growth, plus the dividend’s contribution, and S&P stocks would show no gain at all. You’d lose something like 10% to inflation. The market moonshot has been great for people who believed and stayed invested. Despite assurances from Wall Street banks and TV pundits, the argument for leaning heavily on stocks is a lot flimsier today than before the liftoff, and the appeal of bonds much greater. You never know when gravity will take hold, only that it always does.
This story was originally featured on Fortune.com
