“Investors should not get too comfortable with the high double-digit equity market returns experienced in recent years, especially as the U.S. economy downshifts into 2026. The S&P 500 has notched 20 all-time highs this year and the index’s forward price-to-earnings ratio is north of 22x. These facts, combined with the strength and speed of the post-“Liberation Day” recovery and the dominance of the “Magnificent 7” in equity market returns since 2022, have many investors worried that the U.S. equity market is in bubble territory. It is possible to dismiss P/E valuation concerns – the composition of the equity market has shifted to become more tech-focused, which commands higher valuations as investors pay not for next-12-month earnings but for earnings over the next 5-10 years; and the interest rate environment is today easier than in most of the last five decades. It is similarly possible to dismiss concentration concerns – the emergence of AI is likely a secular theme; the “Magnificent 7” are mostly mature, multi-national companies with strong balance sheets and diversified revenue streams; and earnings growth is supportive of positive price performance.”
Morten W. Langer
