Resources/Weekly Insights

Volume 14, Edition 31 | October 6 - October 12, 2025

Navigating Highs with Healthy Skepticism

Doug Walters, CFA

US Large Cap stocks are trading at a steep premium, but does that make them “expensive”? In our latest Insights, we explore why valuation is a data point, not a verdict—and why smart diversification remains the most reliable strategy in an uncertain future.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

Markets have a way of making headlines when they hit all-time highs. But as we noted in our Quarterly Perspectives, highs are not inherently alarming—they’re a natural byproduct of long-term growth. What perhaps deserves a bit more scrutiny is valuation.

Today, US Large Cap stocks trade at a significant premium to their pre-Covid norms. Last week, the S&P 500’s trailing 12-month Price-to-Earnings (PE) ratio sat 63% above its median from the prior decade. Yes, the PE ratio is a flawed metric, but nonetheless, that’s a notable divergence. It particularly stands out when compared to other segments of the market. For example, the S&P 600 Small Cap index trades at just a 5% premium… basically fair value.

So are large cap stock “expensive?”

Valuation is not a verdict—it’s a data point. A high PE ratio implies investors expect strong future earnings growth. If those expectations are met, today’s prices may prove entirely reasonable. But that’s a big “if.”

Forecasting future earnings is notoriously difficult. To make matters worse, research consistently shows that investment analysts tend to overestimate future returns (I can say that—I use to be one). Optimism can inflate valuations, creating a disconnect between price and reality as momentum and FOMO kick in.

Eyes wide open

This doesn’t mean investors should rush to exit US Large Cap. Markets can remain “expensive” for extended periods, and today’s tech giants who are a big driver of those high valuations—are also highly profitable. But it does mean we should evaluate the current moment with eyes wide open. The future is inevitably unknowable. Ten years from now, we may find that big tech has leveraged AI in a way to fully justify every penny of their high valuations. Alternatively, they could find themselves left behind by a newcomer with a killer AI business model. We’ve seen that story many times over the decades.

In this backdrop, we continue to emphasize diversification over market timing. Equities, as a whole, are not expensive. By spreading exposure across asset classes—small cap, international, gold, bonds—we can reduce reliance on any single narrative about the future. But diversification is not a strategy unique to this moment. Smart diversification is generally smart investing.

While valuation matters, so does the economic context that surrounds it. The market may be pricing in an AI revolution, and it is possible that future will arrive. But history reminds us that optimism, especially when widespread, deserves a healthy dose of skepticism. Diversification can help the skeptic sleep at night.

Jobs Report ??

The government shutdown left investors with little economic information to go on this week as reports like the latest jobs numbers were not released.

Headline of the Week

Flying Blind, For Now

Two weeks into the government shutdown, the Fed is preparing for its next meeting with one eye closed. Key economic reports have gone dark—jobs, inflation, even weekly claims—leaving policymakers without the data they rely on to gauge the economy’s health. Private-sector proxies are filling some gaps, but they paint a mixed picture: hiring is slowing, layoffs are rising, and inflation pressures linger.

There’s a twist: the government is recalling some furloughed workers to publish the CPI report, though timing remains uncertain. That means the Fed may get one critical piece of the puzzle before its late-October meeting—but not the full picture.

The irony is striking. A shutdown meant to signal fiscal discipline has instead amplified uncertainty, forcing monetary policy to navigate in the fog. Whether the Fed can steer without overcorrecting is the question that will define the next chapter.

The Week Ahead

As the government shutdown drags on, economic releases get put on hold shifting all focus to quarterly earnings and the International Monetary Fund (IMF) meeting. With the Jobs report last week and now the Consumer Price Index this week getting pushed out, we are setting up for a big data dump once the government shutdown ends. But until then we will have to make do.

Banking on it!

Earnings season kicks-off with a big bag of big bank earnings, with JP Morgan, Goldman Sachs and Citigroup on Tuesday, Bank of America and Morgan Stanley on Wednesday, Bank of New York, and US Bancorp on Thursday and finally, American Express and State Street Bank finishing the week.
JP Morgan and Goldman Sachs are expected to report double-digit revenue increases from a year-ago period to set the tone and expectations for the rest of the financials are just as hefty.
From the non-bank earnings, Blackrock and Johnson & Johnson stand out as big ones.
Going into the reporting period, S&P 500 earnings growth is expected to be 8.8% in the quarter, while the financial sector is expected to report almost 13% according to Reuters.

A get together!

The International Monetary Fund and The World Bank will be meeting in Washington, D.C. this week.

The gathering of finance ministers and central bankers from G20 nations will certainly have plenty to discuss; from government debt burdens, tariffs, use of Russian frozen assets and the impact of stablecoins are just some.
Tuesday’s release of the World Economic Outlook is usually a big deal.

Making do!

Since most official government economic reports have been put on ice, this is the time when some lesser-followed economic releases may get some interest.

This week it will be the Beige Book and Industrial Production release that are the main events since these are published by the Federal Reserve, which is still open and publishing.
With a rate decision later this month, this data might be more prominent than ever before in the decision-making process.

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