Several summers ago, I hiked to the summit of Mount Bierstadt in Colorado—one of the state’s more popular fourteeners. The climb up was challenging yet straightforward: a wide trail, a steady pace, and clear footing. But the real adventure came next. From Bierstadt’s peak, I crossed the narrow “Sawtooth” ridge that connects to Mount Evans.
The Sawtooth isn’t for the faint of heart. On one side, the drop-off is sheer. On the other hand, a misstep could send you scrambling down steep rock. Each move demands focus. The higher and narrower the ridge, the smaller your margin for error becomes.
That same idea applies to investing when stock valuations run high. During a strong market climb, it’s easy to enjoy the view, to feel like risk has disappeared. But as prices stretch further from underlying fundamentals, the path narrows. The higher we go, the less room we have for mistakes.
When the market is rising, it’s tempting to think price doesn’t matter anymore. After all, when stocks continue to reach new highs, it can feel like the fundamentals have shifted. However, over time, one thing remains consistent: valuations matter.
In recent weeks, investors have been reminded of that reality as markets pulled back from record highs. Technology and AI-related companies, which had driven much of this year’s gains, have seen sharper declines. The reason? Their valuations had stretched far beyond historical averages.
Put simply, valuation reflects what investors are paying today for a company’s future earnings or cash flow. The most common measure—the price-to-earnings ratio (P/E)—tells us how many dollars investors are willing to pay for one dollar of earnings.
Now, high valuations aren’t automatically bad. Sometimes they reflect strong growth potential or low interest rates, but they do change the math for future returns. When you pay more upfront, you leave yourself less room for disappointment—and history shows that lower future returns often follow. It’s like buying a rental property. If you pay double the usual price for the same rental income, your yield goes down. The same principle applies to stocks and even the overall market.
So far, about 82% of S&P 500 companies have beaten earnings estimates, a solid showing. Corporate profits are up roughly 13% year-over-year, and revenues have grown more than 8%. Tech, healthcare, and financial companies have all shown strong results. In short, the economy and corporate America are still in good shape.
But here’s the challenge: a lot of that good news is already priced in. According to FactSet Insight, the S&P 500’s forward price-to-earnings ratio is around 22.7×—well above its 10-year average of 18.6×. That means investors are paying nearly $23 for every $1 of expected earnings. Today’s optimism is already reflected in prices.
When enthusiasm runs high, prices can deviate from their fundamental values. But as we’ve seen lately, that disconnect doesn’t last forever. Imagine being back on that mountain ridge. When the trail is wide and level, it’s easy to look around and enjoy the view. But as it narrows, every step deserves a little more care and attention.
High valuations are like that narrow ridge. The higher the prices go, the smaller the margin for error becomes. A small slip—a disappointing earnings season, higher interest rates, or slower growth—can lead to a sharper drop. That doesn’t mean investors should step off the trail. It simply means walking it with awareness, balance, and a steady pace. The goal isn’t to sprint to the next peak; it’s to reach it thoughtfully and make it back ready for the next climb.
Have a blessed week!
Joe Shearrer
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly. Precious metal investing is subject to substantial fluctuation and potential for loss.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.