Are Stocks Really Overvalued?

Are Stocks Really Overvalued? Why Earnings Growth Matters More Than Headlines

Turn on financial television, scroll social media, or listen to the average market commentator and you will hear a familiar argument: “The stock market is too expensive.” Usually, the case centers around one statistic — valuation.

Today, the S&P 500 trades around 21x to 22x forward earnings, above the historical average of roughly 16x to 17x. On the surface, that sounds alarming. If valuations are 20% to 30% above normal, surely the market must be dangerously overpriced, right?

Not so fast.

One of the biggest mistakes investors make is looking at valuation in isolation without considering the other side of the equation: earnings growth.

Historically, corporate earnings for the S&P 500 have grown around 6% annually over long periods of time. Some years are stronger, some weaker, but that range has generally been the backbone of long-term profit growth in America.

Today, however, earnings growth expectations are dramatically different.

S&P 500 earnings growth is running north of 20% in many forecasts — more than three times the long-term historical average.

That distinction matters.

If earnings are growing at 20%+ while valuations are only modestly above average, the math looks very different than what the headlines suggest.

Think of it this way: investors are paying roughly 20% to 30% more than the historical forward earnings multiple, but corporate profits are growing 200% to 300% faster than normal. That is hardly the setup of a market disconnected from fundamentals.

In fact, valuation should almost always be viewed in context of growth.

Imagine two companies. One trades at 15x earnings and grows profits at 4% annually. Another trades at 22x earnings but grows profits at 25% annually. Which is actually more expensive? The answer is not obvious without understanding the growth profile.

Markets are forward-looking machines. Investors are not buying yesterday’s earnings — they are buying future cash flows.

And today, much of that optimism revolves around productivity improvements, software, artificial intelligence, automation, cloud infrastructure, semiconductors, and enterprise efficiency gains. Whether every company wins is another question entirely, but markets are clearly pricing in stronger profit growth than the historical norm.

That does not mean risk disappears.

Could expectations prove too optimistic? Absolutely. Earnings forecasts are not guarantees. Recessions happen. Policy changes matter. Geopolitical shocks emerge. The market can always correct, sometimes sharply.

But investors should be careful about making broad conclusions based solely on a valuation multiple.

A 22x market with 20% earnings growth is not the same thing as a 22x market with 5% earnings growth.

That distinction matters for financial planning.

Far too many investors sit in cash waiting for a crash because they hear the market is “expensive,” only to miss years of compounding. Others panic during volatility because they confuse short-term price movements with long-term fundamentals.

The lesson is not to ignore valuation — it matters. But valuation without growth is only half the story.

History shows that markets reward businesses that grow earnings, generate cash flow, and innovate over time. The companies leading today’s market may not all be winners a decade from now, but betting against American corporate earnings growth has historically been a losing proposition.

For long-term investors, successful financial planning is not about perfectly timing whether the S&P 500 should trade at 17x or 22x next quarter. It is about building a disciplined strategy that recognizes market cycles, manages risk, and stays invested through uncertainty.

Because in the end, earnings growth — not headlines — is what drives wealth creation.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

Core PCE came in weak, at 0.2% m/m vs. exp. 0.3%. Definitely good, but worth noting this gets PCE inflation to 3Y highs. On the flip side, trimmed-mean PCE showed improvement, which is a Warsh measure.

Q1 GDP was revised from 2% to 1.6%.

Personal Income was 0% m/m vs. exp. 0.4%, while Personal Spending was 0.5%, as expected. Weak income and still-strong spending has been a bit of a theme, of late. Will lack of saving cause problems eventually?

Durable Goods rose for the second straight month, at 7.9% m/m vs. exp. 3.5%. Core Goods was 1.1%, same as last month.

Jobless Claims were 215K vs. exp. 213K, with Continuing Claims going from 1.774M to 1.789M. No problem.

Slow movement with Iran talks continue, sending oil -2% to $87.

A Blue Origin rocket exploded on the launch pad during a test fire, which is taking down space stocks.

AAII Investor Survey showed a modest increase in the Bull/Bear spread, but we still have more bears than bulls, at 36% bulls and 42% bears.

DELL had great numbers, even better than the last great quarter. They expect the party to continue, as well, so shares are up a further 38%.

Inventories, Trade Balance, and Chicago PMI, today.

Bottom line: Slow progress with Iran is helping the party to continue.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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