Market valuation climbs back to Covid boom territory

Everything looks incredibly rosy out there, if the market is to be believed.

With tariff-related inflation still a no-show, the market seems to less inclined to think trade war equals recession. That means expectations for corporate earnings are rising. And there’s nothing in the way of Fed rate hikes on the horizon, or yips emerging from the bond market.

In other words, as they like to say, it’s risk on, which creates a risk of its own: paying too much.

Look, I’ve been droning on about valuation recently, and yes, in the short term it’s a terrible timing device. Stocks can stay expensive and get more expensive for a good long while, especially when there’s a favorable wind at their back.

Case in point: MarketWatch is out with a piece talking about the recent upswing in “story stocks” — companies that might not make a ton of money at the moment, but that nevertheless capture the fancy of traders with convincing narratives about how their technological advantage will inevitably lead to world domination at some point in the far-off, hazy future.

Such tales, when combined with a solid price performance, really seem to be taking off right now, with traders seemingly less worried about a spotty history of profitability. MarketWatch wrote:

“Of the 10 stocks in the Russell 3000 index with the biggest year-to-date gains, many of the companies have one ominous thing in common: a spotty or nonexistent record of generating profit.

Take Aeva Inc. The stock was up more than 500% through Thursday's close, making it the top performer in the U.S. broad-market index. Yet the company reported losses for the past four consecutive quarters, FactSet data showed. The 10th-best stock, OptimizeRx Corp., saw its market value nearly triple this year, despite reporting losses in three of the past four quarters.”

And there are plenty of great stories out there for investors to be enamored of, from the integration of crypto into the legitimate financial system to the never-ending hype surrounding all things AI.

But fuddy-duddies such as myself can’t help ourselves from remarking on high price-to-earnings ratios on the broad market indexes at the moment.

Just look at the forward price-to-earnings ratio of the S&P 500, which climbed above 22x recently.

Until the post-Covid trading boom — it popped up during the stimmy-fueled trading boom of 2021 — I’d never seen a valuation that high during my career as a stonks hack.

More recently, the S&P 500 saw a 22x multiple prior to the tariff tantrum that nearly pushed us into a bear market in April.

Before that, you’ve got to go back to the tail end of the dot-com boom of the late 1990s to see valuations this high.

For the record, I’m not the only one who’s noticed signs of froth in the market. Bank of America analysts were out with a note today saying that small caps are “back to expensive.” Likewise, Deutsche Bank analysts marked some “pockets of exuberance” in the market, like rising bullish call options activity.

But few analysts are suggesting “fading” a rally driven in part by the relentless retail dip-buying that has emerged as a formidable stabilizing force in the market since the Covid crisis hit.

Some problem, crisis, issue, or uncertainty could emerge to dissuade the dip-buying masses from hitting the buy button if or when a serious sell-off comes. But it didn’t happen during the peak of the recent tariff panic.

It’s also quite hard to imagine what it might be. So, for the moment, this is a rally that is hard to dismiss.