The S&P 500’s V-shaped rebound since early April is shaping up as one of the most remarkable comebacks in market history, but it’s also reigniting fears of a potential bubble.
Last week, the index had surged 31% from its April low to reach all-time highs, inflating valuations to levels rarely seen.
In fact, the Shiller P/E Ratio, a widely followed metric comparing stock price to long-term average earnings, has climbed to 38.79. By this measure, it’s the second most overvalued market in history.
Other indicators are flashing similar warnings. The S&P 500’s price-to-peak earnings ratio is now at its highest level since the 2000 dot-com bubble, sitting 54% above its historical mean, according to Charlie Bilello, chief market strategist at Creative Planning.
“We are witnessing one of the best three-month rallies in history,” added The Kobeissi Letter, a widely followed market commentator.
Despite the alarms, many analysts argue this rally is grounded in fundamentals, with Wall Street anticipating a 9% growth in second-quarter corporate earnings, according to FactSet.
Optimism also hinges on progress with trade agreements, pro-growth policies out of Washington, and expectations for Fed rate cuts as early as September.
At least those explanations sound more rational than the one that’s been grabbing headlines this week.
“Nobody knows”
Earlier, The Wall Street Journal’s investing columnist Spencer Jakab wrote a piece under the headline “Why Are Stocks Up? Nobody Knows,” which has made the rounds on the internet.
Commenting on this year’s performance, Jakab wrote, “Few predicted it, and even fewer can coherently explain it.”
He pointed to Goldman Sachs strategist David Kostin’s multiple revisions to S&P 500 price targets, a sign of just how difficult this market has been to call. But Jakab also cautioned that risks remain significant.
Tariffs on major trading partners are now at their highest levels in nearly a century. Economists surveyed by the Journal still see a 33% chance of a U.S. recession within the next year, much higher than expectations at the start of 2025.
“Tariffs could affect things both in terms of higher inflation (and) it could slow the economy,” said Jonathan Miller, senior economist at Barclays.
This dynamic, he added, clouds the economic outlook and makes it harder for the Fed to decide on its next steps for monetary policy.
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