Despite a market correction around the Liberation Day selloff in early April, U.S. stocks remain far from cheap. Valuations, measured by price/earnings (P/E) ratios, have declined but remain well above long-term averages. Analysis from Ned Davis Research (NDR) shows that the S&P 500’s forward P/E ratios dropped 14% to 19.2%, yet that remains 3.7 points above its 40-year average. Trailing operating and GAAP P/E ratios fell about 20% but also remain elevated historically. The drop in forward P/E was cushioned by falling earnings estimates, especially for the first half of 2025.
The key question now is whether earnings will hold up. Consensus expectations for Q1 and Q2 have been revised downward, while the second half of the year remain largely unchanged. Analysts are closely watching the Q1 earnings season to see if companies begin guiding lower for the back half of the year – tariffs could serve as a convenient rationale. Meanwhile, the percentage of companies with rising earnings estimates has dropped from 47% to 35%, edging closer to the 27% level that historically signals a broader weakness. In short, NDR cautions the correction may have eased some excess, but valuations remain stretched and earnings risk is rising. Investors should remain cautious: the market may not be as much of a bargain as it seems.
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