Will the U.S. stock market bull run continue? High valuations face performance tests

According to Zhitong Finance APP, as the second quarter is about to close, the U.S. stock market is extending the hot spring trend into summer, with the S&P 500 index hitting a new historical high. Investors are betting on an imminent interest rate cut by the Federal Reserve, reduced tariff risks, and potential tax cuts and fiscal stimulus plans from Congress, all contributing to the continued rise of U.S. stocks.

However, the current question is whether corporate earnings are sufficient to support this rally in the second quarter. On July 15, JP Morgan will kick off the earnings season, while some investors are beginning to worry that the current market valuation is high and risk volatility is low, which may suggest that the market has overly optimistic expectations for earnings growth and economic performance that may be difficult to realize in the coming year.

Charu Chanana, Chief Investment Strategist at Saxo Bank, stated, "The U.S. market remains the global leader, backed by strong earnings momentum, macroeconomic resilience, and optimism driven by the artificial intelligence boom. The market's trading model of 'buying America' has once again become a focal point." However, she also warned, "With valuations already at high levels, this earnings season must validate the market's expectations for a recovery in the second half of the year; otherwise, the market may face the risk of reassessment."

As of Monday's close, the S&P 500 index reached a historic high of 6201 points, with the overall price-to-earnings ratio (based on expected earnings for the next 12 months) at 22.8 times. According to Goldman Sachs, this is not only historically high but also exceeds the tech-heavy Nasdaq 100 index and the small-cap dominated Russell 2000 index.

Louis Navellier of Navellier Calculated Investing pointed out, "It is clear that the market is reflecting optimistic expectations for corporate earnings ahead of time, and some investors are looking to enter the market before the Federal Reserve cuts interest rates." He added, "Geopolitical risks are clearly underestimated by the market, with investors generally believing that these risks will not have a substantial impact on economic growth, and tariffs may not be implemented or may not significantly raise inflation. As in the past, bull markets are always much less frequent than bear markets."

According to LSEG data, the total earnings of S&P 500 constituents in the second quarter are expected to grow by 5.9% year-on-year, reaching approximately $529 billion. However, since the end of March, the index itself has risen about 10%, far exceeding the earnings growth rate.

More notably, among the 11 major sectors of the S&P 500, nearly half are expected to see earnings remain flat or even decline year-on-year. In the six sectors with earnings growth, about 82% of the growth will be concentrated in the communication services and information technology sectors.

LSEG forecasts an annual earnings growth rate of 8.5% for 2025. Based on this growth rate, the current market valuation is 23.4 times, slightly higher than the current 22.8 times, but the 8.5% growth rate is still far below the market's initial expectation of 14% at the beginning of the year.

Even in the context of high valuations, investors' compensation requirements for risk are quite limited. WisdomTree's calculations show that the current "equity risk premium" between stocks and risk-free government bonds is only 2.4 percentage points, the lowest level since the early 2000s At the same time, market volatility is also close to its low for the year. The Cboe group's VIX index is currently at 16.62, indicating that traders expect the S&P 500 to have an intraday volatility of about 65 points in July, while at the beginning of April, the index suggested volatility of up to 105 points.

Although Clark Bellin, president and chief investment officer of Bellwether Wealth in Nebraska, acknowledges that the market may be "too complacent," he does not believe the current levels are a cause for concern. "New highs in the stock market often make it feel like a pullback is imminent, but in reality, new highs often lead to more new highs." He believes that "this wave of positive momentum could continue for some time, although volatility is always present."

Bellin also pointed out that the biggest challenge investors will face in the second half of 2025 is how to deploy new capital, especially for those investors who did not increase their positions in a timely manner during the market pullback in April