My wife and I are taking our family to Slovakia later this summer to hike the Suchá Belá Gorge. This is a beautiful yet treacherous hike up multiple waterfalls by climbing ladders and walking on sticks of rebar protruding from the rock. That all sounded great last Fall while we were planning it, but now we realize we are not in good enough shape. For us to make that climb, something drastic in our workouts need to change. That pretty much sums up the next climb for the market as well; it needs a boost to go to the next level.
It’s already been a great year for stocks, with the S&P 500 total return of almost 10% year to date. The next leg higher may require more help from higher valuations than positive earnings surprises.
The market has posted strong gains this year despite a war and stubborn inflation, but so far those gains have been driven completely by strong earnings. The forward price-to-earnings ratio (P/E) for the S&P 500 has fallen since the start of the year, while most analysts agree that the earnings-per-share estimate for 2026 has increased by almost 9%.
It seems like investors are starting to push back a bit on AI investment. The hard-to-grasp AI spending has been around $725 billion this year alone, which includes the recent debt and equity raises by Alphabet, NVIDIA, Elon Musk’s SpaceX, and others. In other words, this year’s $200 billion upside surprise in AI capital expenditures probably won’t be repeated, or at least at the same pace.
If earnings outlooks remain stable, and I think they will, the P/E ratio will have to improve for stocks to enjoy another double-digit return over the next six months. For that to happen, stocks will have to start looking like better “deals.” Right now, stock prices are high enough that most new money is shying away from buying stocks (SpaceX was the exception) until they reach a better entry point.
This will only happen with lower oil prices, lower inflation, Federal Reserve rate cuts, and lower long-term interest rates. These may be difficult goals to hit, which may mean more modest second-half stock returns. Some say the Fed might actually raise interest rates, and there is also talk about the Trump Administration giving Americans a “Tariff Rebate” stimulus. Time will tell on all of it. One thing this market has proven this year is that you don’t want to sit on the sidelines because you never know what will happen. This bull market keeps taking licks and keeps on going.
The tricky part of the hike in Slovakia is that it is one-way only. Once you start, you can’t turn around, and if you are injured or tired, your group has to carry you up the trail to get back to your car. It might not be enough, but we have added a StairMaster to our office gym and are trying hard to get ready for this hike. I wish I could say it was because we had a strong desire to get in shape, but the reality is, we don’t trust our kids to carry us! The market doesn’t have a StairMaster, but it needs something like that for valuations to go up as well.
Have a blessed week.
Richard Baker
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. 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.
All investing involves risk, including loss of principal. No strategy assures success or protects against 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.