Investor sentiment has once again turned positive, pushing U.S. markets back into historically elevated valuation territory. This trend suggests that the market anomalies observed over the past five years may be here to stay.
Major U.S. stock indices—including the Dow Jones, S&P 500, and Nasdaq 100—are hovering around levels seen at the start of 2025. Investors have returned to pricing in American assets at levels similar to those before the final stage of euphoria that followed Donald Trump’s election. Notably, the S&P 500 experienced a strong January rally this year, only to decline after the inauguration.
“Investors are convinced that the risk associated with tariffs is fading into the background,” said Tymoteusz Turski, equity market analyst at XTB, in an interview with MarketNews24. “Uncertainty—one of the key drivers behind the shift to safe-haven assets—has decreased. In April, we saw significant drops in U.S. bond yields and a new all-time high in gold prices, without a clear signal from the Fed regarding interest rate cuts.”
Does this signal the return of a bullish trend and renewed faith in U.S. equities? For now, the market’s rise is driven more by rising index prices than improved earnings forecasts. It’s worth noting that earnings projections tend to lag behind market fluctuations, especially after the kind of volatility seen over the past six weeks.
Valuations may be further supported by upward revisions in earnings forecasts, but that would require more clarity about the U.S. economic outlook. Inflation expectations in Q1 rose to their highest levels since late 2023. While some of these concerns may ease in light of lower-than-expected tariffs, companies will still have to contend with higher duties than in the past five years—a period that coincided with the most intense market valuation pressures.
Recent U.S. inflation data has added to the market’s optimism. In April, consumer prices rose by 2.3%, below the 2.4% recorded in March and forecasted for April. Food prices even fell for the first time in nearly a year.
However, inflation expectations remain a crucial component of actual inflation. While current price increases appear contained, persistent inflationary expectations could eventually push prices higher. That in turn could erode companies’ real earnings, weakening the fundamental case for high asset valuations.
For investors, this means that after rebounding from fair valuation levels, U.S. equities are once again entering “expensive” territory.
Still, this doesn’t mean the rally must end. The market appears to be settling into a new norm of persistently high valuations—a pattern reminiscent of the past five years. These anomalies may now represent a long-term shift, with relatively high pricing becoming the dominant trend on Wall Street.
“Let’s not forget that there is still no clear and comprehensive agreement between the U.S. and China regarding tariffs,” cautioned Turski. “We don’t know what will happen in less than three months when the current three-month tariff freeze expires. Nor are there any new trade deals with other countries that would reverse recently imposed duties. We’re in a holding pattern.”
Should a “black scenario” unfold—such as a breakdown in trade negotiations—markets could react similarly to the volatility seen in early April. This uncertainty is already reflected in quarterly earnings reports from major corporations, many of which have lowered their forecasts.
“Investors strongly dislike when companies downgrade their financial guidance,” Turski emphasized. “That’s why the upcoming second-quarter earnings season will be especially important.”
Source: Manager+
