Vericrest Insights - March 2025
If you read or watch any sort of financial news, you’ve, no doubt, seen/heard prognosticators talk of the current valuation of the stock market – are we at the precipice of a market correction?
To assess whether the stock market, specifically the S&P 500, is overvalued, we can look at its forward-looking price-to-earnings (P/E) ratio and compare it to historical levels. The forward P/E ratio measures the current market price of the S&P 500 index divided by the expected earnings per share over the next 12 months, based on analyst estimates. It is a widely used metric to gauge whether stocks are priced reasonably relative to their future earnings potential.
As of last week, the S&P 500 forward P/E ratio is around 22.2, based on recent data from late 2024 and early 2025 trends. Historically, this is on the higher side. For context, the 5-year average forward P/E is approximately 19.6, the 10-year average is about 18.1, and the 20-year average sits closer to 15.8. Over the past 25 years, the forward P/E has rarely exceeded 22, with notable peaks at 24.4 in March 2000 (during the dot-com bubble) and 22.2 in April 2021. So, the current level is in the upper range—higher than most historical averages but not at an all-time extreme.
What does this mean? A forward P/E of 22.2 suggests investors are paying $22.20 for every $1 of expected earnings over the next year, which is about 13% above the 5-year average and 23% above the 10-year average. This premium could indicate optimism about future earnings growth, possibly driven by sectors like technology, which often carry higher valuations. However, it also raises questions about whether those earnings expectations are realistic—since the forward P/E relies on projections, it can inflate if analysts overestimate or deflate if they miss the mark.
Historically, elevated forward P/E ratios don’t always signal an imminent crash, but they do suggest the market might be stretched. For instance, in November 2024, the forward P/E hit 22.2, the highest in over three years, yet the market continued to climb, supported by projections of record-high earnings for 2025 (around $274-$275 per share). Back in 2000, though, a peak of 24.4 preceded a major correction.
Keep in mind, that this P/E ratio doesn’t just exist in a bubble - underlying conditions such as interest rates, economic growth, and earnings delivery all play a major role.
Right now, the market isn’t screaming “bubble” like it did in 2000, but it’s not cheap either. Compared to historical norms, the S&P 500 is trading at a premium, which could mean less room for error if earnings disappoint or economic headwinds pick up. On the flip side, strong growth expectations could justify it if companies deliver. It’s a mixed bag—overvalued by some measures, but not wildly so.
The S&P 500 has recently pulled back from its mid-February highs – roughly 5% off its all-time high – putting it in what some call “correction territory” (typically a 10% drop, though it’s not there yet based on these numbers). The shift isn’t a full-blown crash but a choppy consolidation, testing investor nerves after a two-year bull run. And we do expect continued market volatility, given the current landscape, and there are a few key drivers that could keep the S&P 500—and the broader market—on edge. Volatility often stems from uncertainty, and right now, there’s plenty of that to go around.
Concerns over the rapid pace of artificial intelligence investment, coupled with tariffs, government budget reductions, and lackluster consumer sentiment data, have fueled uncertainty in the stock market. For example, the Magnificent Seven tech stocks, key drivers of market gains in 2024, have dropped approximately 7% from Election Day through Friday afternoon.
There’s a growth scare echoing last summer’s jitters—soft economic data might be spooking markets. December 2024 GDP growth was solid at 2.3%, but if January or February numbers (not fully out yet) show a slowdown in consumer spending or business investment, that could explain the wobble.
The Fed’s pause on rate cuts in January, holding rates at 4.25%-4.50%, adds pressure—Powell’s “no hurry” stance means no quick relief for borrowing costs, and sticky inflation (PCE at 2.6% in December) keeps the heat on. Markets had priced in more cuts; this recalibration could be rattling confidence. If inflation ticks back up—maybe from energy prices or wage pressures—the Fed could tighten more than expected, squeezing stock valuations (higher rates discount future earnings more heavily). Conversely, if they cut too aggressively and signal economic weakness, that could spook markets too. Traders react to every Fed whisper, and that back-and-forth keeps volatility alive.
Additionally, geopolitical risks are simmering. Trade tensions, conflicts, or disruptions (think Middle East flare-ups or China-U.S. friction) can rattle supply chains and commodity prices—oil, semiconductors, you name it. The market’s been resilient, but it’s not immune. A single headline can swing sentiment overnight.
Tariffs are dominating headlines—25% on Mexico and Canada were delayed, but a 10% hike on Chinese goods hit in February, and talk of metals tariffs or broader “reciprocal” measures looms. The U.S. Trade Policy Uncertainty Index spiked in January to near-record levels, per Schwab’s February 13 update. This “headline risk” can freeze business spending and jolt sectors like manufacturing or tech, which rely on global supply chains. The dollar’s 10% surge in 2024, with more strength expected if tariffs stick, is already shaving 2% off 2025 revenue forecasts for U.S. multinationals, per some analysts.
So, the shift right now? A market stepping back from euphoria, grappling with policy fog, sticky inflation, and a reality check on growth and earnings. It’s not a collapse—resilience persists, and a rebound could hit if data firms up—but the easy gains of 2024 might be over. Volatility’s the name of the game until clarity emerges on tariffs, Fed moves, or Q1 results.
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Warren Buffett’s 2024 Investing Playbook: Stay the Course
Those who have been reading my newsletters know my admiration for Warren Buffett, and his 2024 Berkshire Hathaway shareholder letter, released on February 22nd, offers more timeless wisdom for investors. In it, Buffett emphasizes patience and reinforces the value of staying the course, urging a focus on long-term growth—like America’s economic resilience—over reacting to short-term volatility. This underscores the importance of discipline, avoiding impulsive moves, and seeking quality investments at fair valuations. Buffett also admits to past mistakes, counseling swift action to correct errors, a reminder to regularly reassess portfolios without clinging to losing positions, while his confidence in equities over cash long-term highlights the power of compounding for sustained wealth building.
For those eager to dive deeper into Buffett’s insights, I recommend "3 tips from Warren Buffett's 2025 shareholder letter that can make you a smarter investor.” This article distills key lessons from his latest letter, including learning from mistakes, sticking with equities for growth, and finding value in unexpected places—like his Japanese investments. Written in Buffett’s clear, approachable style, it’s a quick read that reinforces the strategies I advocate: act decisively on errors, prioritize quality businesses, and stay patient. His counsel: stick to your knitting, bet on enduring value, and let time do the heavy lifting.
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Required Reading
Here are a few articles that I’ve recently published or came across that are worth reading:
Time in the market can top market timing.
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Three reasons to stay invested right now:
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Here is an in-depth look at the U.S. deficit and how it impacts the Treasury market.
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Do you know the difference between a tax credit and a tax deduction?
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Spring weather is almost here – fingers crossed. Hope you and your families get out there and enjoy it!
Bill
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#CFP #financialplanning #feeonlyadvisor #vericrestinsights
Bill Davis is a CERTIFIED FINANCIAL PLANNER? and Managing Partner with Vericrest Private Wealth LLC, a financial advisory firm in Newtown, Pennsylvania.
Vericrest Private Wealth LLC ("Vericrest") is an SEC registered investment advisory firm. The information provided herein should not be?construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or investment advisory service.?Past performance is no guarantee of future results, and there is no guarantee that future investments will be profitable. While we believe that third party information provided is accurate, Vericrest does not guarantee or otherwise warrant such information.?For more information please contact Vericrest or refer to the Investment Adviser Public Disclosure website?(www.adviserinfo.sec.gov) to review important disclosures about our firm.?