'Valuation says... nothing' 🤷🏻♂️
Plus a charted review of the macro crosscurrents 🔀
📈The stock market rallied to all-time highs, with the S&P 500 setting a closing high of 6,901.00 on Thursday. The index is now up 16.1% year-to-date. For market insights, check out the Stock Market tab at TKer. »
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Wall Street strategists are almost unanimously bullish on the outlook for earnings.
Their estimates for S&P 500 earnings in 2026 range from $300 to $320 per share, implying 11% to 19% year-over-year growth from this year’s expected level.
However, strategists are divided on valuations — specifically, on the direction of the forward price-earnings (P/E) ratio as it hovers near five-year highs.
Some argue that the elevated forward P/E is justified and sustainable, which should help the market deliver above-average returns in 2026.
Others argue that the high P/E is a market headwind, limiting returns as it potentially gravitates lower toward the long-term mean.
People who believe that valuations tend to revert to historical means (a phenomenon that’s been disputed) lean toward that more conservative view. Maybe they’ll be proven right this time.
TKer Stock Market Truth No. 6: Valuations won’t tell you much about next year
While P/E ratios may help us understand whether prices look cheap or expensive relative to history, evidence shows the level of the forward P/E ratio says effectively nothing about what the stock market will do over a one-year period.
In their 2025 outlook report, Schwab’s Liz Ann Sonders and Kevin Gordon shared this fantastic illustration (which TKer subscribers have seen before). It plots the one-year return on the S&P 500 for various forward P/E levels since 1958.
“You can see that the relationship is a very weak -0.12 — essentially insignificant,” Sonders and Gordon wrote. “It underscores the important market truth that valuation is a horrible market-timing tool (as if a good timing tool even exists).“
The chart is chaotic. Yes, there are periods where a 22x forward P/E preceded negative returns. But it’s also a level that’s preceded very positive returns numerous times.
Three important notes 🙋🏻♂️
First, there are far more dots on the right side of the y-axis in the above chart than there are on the left side, a reminder that the stock market usually goes up. This is true even for periods of elevated P/E ratios.
I’d argue this is because earnings and expectations for earnings are usually going up, and earnings are the most important long-term driver of prices. Indeed, much of the stock market rally this year can be explained by earnings expectations trending higher even as P/E ratios flatten.
Second, falling valuations don’t necessarily mean prices have to fall. Stocks can rise as valuations fall as long as earnings are growing faster than prices. More here, here, and here.
Third, the relationship between valuations and stock returns is stronger when extending the time horizon. But as we discussed here and here, the relationship isn’t perfect.
None of this is to say valuation metrics like the forward P/E are totally useless in the context of how you decide to make adjustments to your portfolio.
Rather, it’s just a reminder that you shouldn’t be surprised if the market does unlikely and arguably irrational things over very short periods of time.
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Related from TKer:
Forecasters are making a bold 2026 prediction that skeptics will hate 😤
What happened after the last time the S&P’s forward P/E was this high 🤔
‘There is no evidence of mean reversion in equity valuations’ 🤯
Where Wall Street’s year-end price target calculations often go wrong 😑
Oppenheimer, Fundstrat, Goldman Sachs set 2026 targets 🔭
Last Sunday evening, Oppenheimer’s John Stoltzfus unveiled his 2025 S&P 500 year-end price target: 8,100. This is on $305 earnings per share (EPS) for the year.
“Our positive outlook for the S&P 500 is based on a number of factors that include persistent resilience evidenced in U.S. economic data, S&P 500 corporate results throughout most of this year beating expectations,” he wrote.
On Thursday, Fundstrat’s Tom Lee offered a more modest outlook with his 7,700 target on $307 EPS.
“The significant ‘Wall of Worry’ is a tailwind for the bull market,” Lee wrote. “New Fed = dovish policy = positive for stocks in 2H.“
Also on Thursday, Goldman Sachs’ Ben Snider set his 2026 year-end target at 7,600 on $305 EPS.
“Our estimates incorporate GS macro forecasts for solid US GDP growth and a weaker US dollar alongside GS equity analyst forecasts for continued earnings strength among the largest technology stocks,” Snider wrote. “Our 12% EPS growth forecast for 2026 combines revenue growth of 7% with 70 bp of profit margin expansion.“
So far, we’ve been discussing strategists’ (top-down) forecasts. It so happens that the industry analysts (bottom-up) have price targets that are not far from the median strategist’s target.
“Industry analysts in aggregate predict the S&P 500 will have a closing price of 7,968.78 in 12 months,” FactSet’s John Butters wrote. “This bottom-up target price for the index is calculated by aggregating the median target price estimates (based on the company-level target prices submitted by industry analysts) for all the companies in the index. On December 11, the bottom-up target price for the S&P 500 was 7,968.78, which was 15.5% above the closing price of 6,901.00.”
For more, read: Wall Street’s 2026 outlook for stocks 🔭
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🚨Despite the government reopening after a lengthy shutdown, economic data from federal agencies continues to be delayed. Until that data is released on its normal, timely schedule, we’ll be leaning more on private sources of data.
✂️ Fed cuts rates. On Wednesday, the Federal Reserve lowered its benchmark interest rate target range to 3.5% to 3.75%, down from 3.75% to 4%.
From the Fed’s policy statement: “Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.”
The committee raised its projections for GDP growth while lowering them for inflation. It also signaled that more rate cuts could come in 2026 and 2027.
For more on what Fed policy could mean for markets, read: About Fed rate cuts and stocks ⚖️
💼 New unemployment insurance claims rise, but total ongoing claims decline. Initial claims for unemployment benefits rose to 236,000 during the week ending Dec. 6, up from 192,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, declined to 1.838 million during the week ending Nov. 29.
Low initial claims confirm that layoff activity remains low. The decline in continued claims is encouraging as it suggests laid off workers are finding new jobs.
For more context, read: The hiring situation 🧩 and The labor market is cooling 💼
🎈 Inflation expectations could be cooler. From the New York Fed’s November Survey of Consumer Expectations: “Median inflation expectations in November remained unchanged at the one-year-ahead horizon (3.2%) and remained steady at the three-year and five-year-ahead horizons (3.0%).”
For more, read: The end of the inflation crisis 🎈
👎 Consumers expect their financial situations to get worse. From the New York Fed’s November Survey of Consumer Expectations: “Perceptions about households’ current financial situations compared to a year ago deteriorated notably, with a larger share of respondents reporting that their households were worse off compared to a year ago, and a smaller share reporting they were better off.”
More: “Expectations about year-ahead financial situations also deteriorated slightly, with a smaller share of respondents reporting that their households are expecting to be better off a year from now.“
⛽️ Gas prices dip further below $3. From AAA: “The holiday season is delivering a gift for drivers as the national average dropped 5 cents since last week to $2.94. Gas prices are the lowest they’ve been in four years. The national average has stayed below the $3 mark since hitting $2.99 on December 2. As a record number of travelers prepare to hit the road later this month, they’ll be paying less than they were last holiday season, when the national average was $3.04 to close out 2024.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🤷🏻♂️ Small business optimism ticks lower. The NFIB’s Small Business Optimism Index rose to 99.0 in November from 98.2 in October. From the NFIB: “Although optimism increased, small business owners are still frustrated by the lack of qualified workers. Despite this, more firms still plan to create new jobs in the near future.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃
🤔 Job growth may be improving. According to payroll processor ADP, private U.S. employers added an average 4,750 jobs per week in the four weeks ending Nov. 22.
While the number is positive, it continues to be well below longer-term trends. For more, read: The unofficial data is unambiguously discouraging 💼
🛍️ Retail sales are holding up. According to the Chicago Fed’s Advance Retail Trade Summary, sales climbed 0.4% in November.
Adjusted for inflation, sales were unchanged from the prior period.
💳 Card spending data is holding up. From JPMorgan: “As of 05 Dec 2025, our Chase Consumer Card spending data (unadjusted) was 0.3% below the same day last year. Based on the Chase Consumer Card data through 05 Dec 2025, our estimate of the US Census October control measure of retail sales m/m is 0.52%.“
From BofA: “Total credit and debit card spending per household slowed to 1.3% year-over-year (YoY) in November, according to Bank of America aggregated card data, indicating solid growth but at a less robust rate than October. Seasonally-adjusted (SA) spending growth per household was flat month-over-month (MoM).”
For more on economic activity, read: 9 once-hot economic charts that cooled 📉 and We’re at an economic tipping point ⚖️
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.22%, up from 6.19% last week: “The average 30-year fixed-rate mortgage is well below the year-to-date average of 6.62%, providing some sense of balance to the housing market.”
As of Q3, there were 148.3 million housing units in the U.S., of which 86.9 million were owner-occupied and about 39% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
Below are data that were released by Federal agencies last week. The numbers are a bit stale, but worth seeing.
💼 Job openings tick higher. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 7.67 million job openings in October, up from 7.66 million in September.
We don’t have October unemployment figures due to the government shutdown. But in September, there were 7.60 million unemployed people — meaning there were 1.0 job openings per unemployed person. This continues to be a sign of excess demand for labor. However, this metric has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and Revisiting the key chart to watch amid the Fed’s war on inflation 📈
👎 Layoff activity picked up, hiring slows. Employers laid off 1.85 million people in October, the highest level since January 2023. While challenging for the people affected, this figure still represents just 1.2% of total employment. This metric is consistent with a growing economy. But it’s also at the highest rate since September 2024.
For more on layoffs, read: Every macro layoffs discussion should start with this key metric 📊
Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.15 million people. This suggests most laid-off workers continue to find new jobs.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In October, 2.94 million workers quit their jobs. This represents 1.8% of the workforce. The rate continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.
For more, read: Promising signs for productivity ⚙️
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.6% rate in Q3.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and We’re at an economic tipping point ⚖️
Putting it all together 📋
🚨 The Trump administration’s pursuit of tariffs is disrupting global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Furthermore, the delay of economic data from federal agencies due to the government shutdown has made it more challenging to read the economy. Until we get more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, appears to be modestly positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% of the funds beat the index over the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
