Wall Street's Rebound Puts Pressure on Earnings to Justify High Stock Prices

The stock market's recent rally, sparked by a temporary easing of trade tensions between the U.S. and China, appears to be losing momentum. After an initial wave of optimism that pushed stocks higher, investors are beginning to feel uneasy about current market valuations and the uncertain outlook for corporate earnings.

‍

Adam Parker, founder of Trivariate Research, expressed skepticism in a client note released Sunday. He warned that the risk-reward setup for the S&P 500 is becoming increasingly unattractive. Parker pointed to softening earnings projections as a key concern, especially in the context of historically high market valuations.

‍

According to Parker, the average third-quarter year-over-year earnings growth rate over the past two decades stands at 4.7%. In 2024, that number rose to 7.2%, surpassing the long-term average. However, estimates for the third quarter of 2025 remain elevated at 7%, despite a much more challenging earnings comparison. This comes roughly six months after the introduction of what Parker described as the most significant round of tariffs in nearly a century.

‍

“This all seems a bit inconsistent,” Parker noted. “We just don’t think the math adds up.” His skepticism reflects broader concerns that current growth forecasts may be too optimistic given the global trade environment and other macroeconomic headwinds.

‍

FactSet data shows the S&P 500 is currently trading at a forward price-to-earnings (P/E) ratio of around 21.6—roughly the same valuation levels seen in late 2024, just before former President Donald Trump introduced the new wave of tariffs. At these valuation levels, many analysts question how much room is left for stocks to run, especially without stronger earnings growth to support further gains.

‍

Anthony Saglimbene, chief market strategist at Ameriprise, echoed some of these concerns in a Monday note to clients. He observed that investor sentiment has shifted rapidly—from a cautious, “glass-half-empty” mindset earlier in the year to a more optimistic “glass-half-full” perspective in recent weeks. This shift in tone, Saglimbene noted, has narrowed many of the opportunities that emerged when markets were more pessimistic in early April.

‍

The question now is whether the U.S. economy can sustain enough growth to justify current equity valuations. Since the pandemic, the economy has delivered a series of upside surprises, defying frequent recession warnings. Some analysts believe that strength may continue to support stock prices—even if the earnings outlook becomes more uncertain.

‍

Michael Grant, co-chief investment officer at Calamos Investments, told CNBC that he believes fears of an impending recession are overblown. In his view, many economists are underestimating the durability of the U.S. economy. Grant argued that the broader macroeconomic picture is improving and that recent policy moves, including the tariff strategy, are just one part of a wider stimulus effort taking hold across multiple sectors.

‍

What the market seems to be pricing in right now is not just the tariff relief itself, but a broader sense that stimulus is flowing through the economy,” Grant said. He suggested that the recent changes could spark new areas of growth and help sustain the expansion, even in the face of higher interest rates and trade-related disruptions.

‍

Still, questions remain about whether current earnings forecasts and market valuations fully reflect the risks ahead. As the U.S. grapples with policy shifts, uncertain global trade dynamics, and lingering inflationary pressures, investors may find it difficult to remain as optimistic as they were during the post-announcement rally.

‍

While a strong economy may help prevent a deeper market correction, it may not be enough to push stocks significantly higher from current levels—especially with valuations already stretched and earnings expectations elevated. As a result, some analysts recommend a more cautious approach in the coming months, particularly as the effects of the tariff agreement and other fiscal measures begin to play out.

‍

In summary, while the initial euphoria following the U.S.-China tariff deal gave markets a boost, that enthusiasm now appears to be fading. With earnings growth projections facing tougher year-over-year comparisons and valuations sitting at relatively high levels, many investors are reassessing whether the current bullish sentiment can be sustained.

‍

Going forward, market participants will likely need to see stronger economic data and more clarity on policy direction before committing to another leg up in the rally.

‍