U.S. stocks face "overvaluation risk," requiring two key factors to "rescue the market"

According to the Zhitong Finance APP, the U.S. stock market has recently reached new highs under multiple pressures, but concerns about overvaluation have arisen. The price-to-earnings (P/E) ratio of the S&P 500 has reached 22 times, significantly exceeding the long-term average by 35%, with several indicators showing it is at a historical high. Whether the market can continue to rise depends on whether corporate earnings can exceed expectations or if the Federal Reserve will cut interest rates. However, given the high valuation levels, the threshold for exceeding earnings expectations is very high; at the same time, the Federal Reserve has also indicated that it is not in a hurry to adjust policies.

Currently, the U.S. stock market is facing a rare unfavorable situation in history. In 2025, many adverse factors have emerged simultaneously: the new U.S. government is struggling to adjust the global order and implement large-scale tariff policies, while conflicts in the Middle East have brought many uncertainties. Nevertheless, the U.S. stock market continues to move against the wind, reaching new highs and is just a step away from its historical peak.

However, the higher the S&P 500 index rises, the more people worry that its P/E ratio is starting to appear too high. Data shows that the current P/E ratio of the index is 22 times the expected profits for the next 12 months, which is 35% higher than the long-term average. Among the 20 valuation indicators tracked by Bank of America strategists, the S&P 500 index is considered overvalued on every single indicator.

Although valuation itself is not an effective market timing tool, given that the stock price movements of S&P 500 constituent companies far exceed their operational conditions, there is a rough measurement method that can intuitively reflect the degree of this serious disconnection in valuation. At this time, investors are facing some key risks. The deadline set by U.S. President Trump on July 9 for reaching a tariff agreement with major trading partners is approaching, and the next earnings reporting season is about to begin.

A Bloomberg model that considers factors such as U.S. Treasury yields, earnings per share, and equity risk premiums shows that, based on historical data, the reasonable P/E ratio for the S&P 500 index should be maintained at around 17.7 times, while the current P/E ratio is 23.7 times. To bring the P/E ratio back to a reasonable value level, the earnings level of this indicator would need to grow by 30% over the next year (assuming stock prices remain unchanged).

Kevin Gordon, a senior investment strategist at Charles Schwab, stated, "The current market level is sustainable, but we cannot have too much confidence from now on. The earnings expectations for the second half of this year may be overly optimistic, and with the P/E ratio approaching cyclical highs, this puts greater pressure on earnings growth to exceed expectations. This is not an impossible goal, but the standards are high."

According to Bloomberg strategists Gina Martin Adams and Michael Casper, in addition to earnings growth, significant interest rate cuts by the Federal Reserve would also be another way to narrow the gap between the fundamentals of the S&P 500 index and market prices They did not specify what degree of interest rate cuts by the Federal Reserve would be needed to achieve this goal. On Tuesday, Federal Reserve Chairman Jerome Powell reiterated his view that policymakers do not need to rush to adjust policies, but lower inflation levels and weak labor hiring may indicate that rate cuts could occur earlier this year.

So far, even though the fundamentals are at odds with the rise in stock prices, Wall Street strategists still advise investors to view any potential pullbacks as buying opportunities—especially in technology stocks and growth stocks