By Gary Aiken | August 7, 2025
In our Forecast Report, we noted that U.S. stock valuations were at all-time highs. Those high prices reflected the market’s collective belief that certainty about the future was also high. That future certainty included a few important assumptions. If any one of those assumptions fell, U.S. stock prices would certainly decline amid increased vagueness – like unexpected clouds darkening what was supposed to be a clear sky on a sunny day.
Stocks reflected three main assumptions leading into January. First, that revenue and earnings growth would continue apace and maybe even accelerate with lower taxes and less regulation. To be sure, we have seen companies continue to report positive revenue and earnings growth amid a changing political landscape. That has been true for big tech companies, industrial companies, and energy companies so far this quarter.
Second, inflation would continue to moderate and so long-term interest rates could decline. While inflation has not quite moderated, thus far the impacts of tariffs have not bled through. Still, inflation has been sticky above the Fed’s 2% target. At the same time, recent data points to a mildly weaker job market. Short-term interest rates are likely to decline later this year. If short-term rates do not induce significant additional economic growth, long-term rates are likely to decline with them – this is called a “parallel shift” in the yield curve.
Third, no more bad news from the rest of the world. This has been a mixed bag. Israel has defeated all its significant foes, and the Iranian nuclear threat has been removed. While hostages remain in the dungeons of Gaza, the likelihood of externalities for the region and global trade have been reduced to nearly zero. Russia continues to relentlessly bomb Ukraine as Ukraine holds Russia from gaining any additional territory. This stalemate is certainly horrible, but unlikely to involve NATO in a larger conflict. China continues to align itself with America’s enemies and has designs on Taiwan but doesn’t seem to be taking concrete steps beyond its usual provocations.
And so, markets shrugged off the Liberation Day tariff regime as a negotiating ploy, dove headlong into decent earnings growth and received the passing of the One Big Beautiful Bill with applause. In doing so, stocks reached new all-time highs in July. Since stock prices have made a round trip, it’s important to survey where we stand with market assumptions and prices once more.
This month’s chart reviews forward price-to-earnings ratios. Since the market thinks so highly of future earnings, stock prices reflect a willingness to pay dearly for a future that is anything but certain. Technology stock prices are in the 95th percentile relative to their P/E ratios over the past 20 years. While Nvidia and Microsoft are in the news, other sectors find similarly near peak pricing. Consumer Staples, Industrials, and Financials are in the 97th, 95th, and 96th percentile, respectively. Even docile sectors like Utilities reflect prices 91% higher than their relative pricing over the past 20 years.
One Year Forward Price-to-Earnings (P/E) Ratios
Source: Bloomberg Finance, L.P.
While high prices in and of themselves are not a worry – after all, in a bull market we expect stocks to make new highs every few days – the assumptions of January are top of mind again. The tariff rates that were negotiating ploys a few months ago, are emerging as permanently higher tariff levels as “deals” are reached. While the exact distribution method of tariffs through the economy isn’t known, we do know that it will be reflected as increased costs to businesses and consumers – meaning we should expect slower revenue growth – not the broad acceleration baked into stock prices.
Tariff revenues have already started to flow into the U.S. Treasury. This should offset some of the revenue losses from tax cuts next year. Even so, this revenue will not fully offset the expected growth in outlays. Large fiscal deficits and a growing national debt are likely to be permanent features. So even though a slowing economy, with a weakening labor market and moderate inflationary pressures may enable the Federal Reserve to lower short-term interest rates, long-term interest rates will continue to reflect the decreasing creditworthiness of the U.S. government.
In conclusion, we have made a round trip in U.S. stock prices from the highs of February to the April lows, and back to July highs. At the same time, none of our concerns expressed in January’s Forecast Report have materially changed. Concord’s general asset allocation ideas remain unchanged: diversify internationally, keep bond portfolios short duration and high quality, and rebalance to ensure your stock/bond mix reflects your risk tolerance and will enable you to buy low and sell high. With U.S. stock prices at or near all-time highs on an absolute and relative basis, rebalancing makes sense to us.
Author
Gary Aiken, Chief Investment Officer
Gary Aiken is the Chief Investment Officer for Concord Asset Management and is responsible for macroeconomic analysis, asset allocation, and security selection, as well as trading and investment operations.
Gary has over 23 years of investment experience and holds an undergraduate degree in economics from the University of Maryland and an MBA from The George Washington University School of Business.
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