Stock valuations are expressed as a P/E ratio. When prices rise the P/E ratio rises if earnings stay the same or decline. When earnings rise the P/E ratio declines if prices decline or rise more slowly than earning.
I post the chart of CAPE (Price - to- earnings ratio of the S&P 500 based on average inflation-adjusted earnings from the previous 10 years) every week. This chart smooths out the volatility caused by short-term factors to show the underlying valuation of the stock market going back to 1870. Of course, the SPX has changed over the many decades but it does give data on the shifting levels of market valuations in good times and bad. The median CAPE is 16. The current CAPE is 40. The bubble resembles the bubbles of 1929 and 1999, even to the underlying excitement and immense borrowing to finance new technologies that wouldn’t pay off for many years ahead.
METARs and other investors are feeling flush this week as the SPX reaches another record high despite the uncertainty over the war with Iran.
Note that the P/E chart below is a short-term chart, not the 10-year moving average chart linked above.
The Record Stock Market Rests on Some Big One-Offs
There are two significant reasons earnings expectations have soared—and they are both probably temporary
By James Mackintosh, The Wall Street Journal, April 18, 2026
It’s six months, give or take, since AI excitement drove stock valuations above their 2020 bubble high to reach the highest since 2000, the peak of the dot-com bubble.
Something odd has happened since: Valuations, measured as the price-to-earnings or PE ratio, have plunged, while stocks rose to a record high this week.
This isn’t just unusual. It is unprecedented in data back to 1985. Valuations have never fallen so much over six months without stocks falling too…
The reason for the recent drop in valuation is also unusual: The E part of the PE ratio, companies’ expected earnings, has soared. Because stock prices have made only small gains—the S&P 500 is up 3% from its high in October—the PE ratio has dropped, meaning shares are less expensive than back then. …
This time, there are two big reasons earnings expectations have soared—and they are both probably temporary. The first is that microchip prices have soared because of huge artificial-intelligence demand. The second is the war in Iran, which has given energy companies a huge boost…
A valuation based only on the next 12 months doesn’t tell us whether to buy or sell, because a slowdown is likely only the year after, or further out…
Current prices for both the AI stocks and oil are based on the market’s best guess for the two themes of the moment: Data-center building and the Iran war. This has made the market look cheaper than before. But it wouldn’t take much—the AI boom’s turning to bust or a peace deal in the Gulf—to make today’s cheapness look expensive in retrospect… [end quote]
I won’t say anything about the war in Iran and the situation in the Strait of Hormuz because it’s unpredictable. If the Strait of Hormuz opened today, it would take several weeks to two months for significant oil supplies to reach buyers, especially in Asia-Pacific, rather than days. And who knows when shipping will start again? It may take months to restore oil field output, as many fields, particularly those shut down for weeks, require complex technical restarts.
The stock market seems to be shrugging off the impact of an oil supply shock. It’s almost as if traders are so confused by the uncertainty that they’re just ignoring it and going back to business as usual.
Stock indexes rose to records. VIX is down. Bullish percent is up. The Fear & Greed Index is in Greed. The trade is risk-on as the price of SPX and junk bonds are rising faster than the 10 year Treasury price.
The Treasury yield curve fell slightly last week. The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, showed looser financial conditions. Financial stress fell. The looser financial conditions provide the money to juice the markets.
Gold, silver, copper and bitcoin rose. USD, oil and natgas fell. USD is near the bottom of the channel that began in January 2023 which is at a relatively strong level.
The Atlanta Fed’s GDP Now (growth rate of real gross domestic product (GDP)) estimate for 2Q26 was 1.3% on April 09, 2026. Though not predicting a recession, this is a quick decline from the optimistic estimate over 3% in early March, before the U.S. and Israel attacked Iran.
The Cleveland Fed’s Inflation Nowcast predicts increasing inflation. Note the difference between CPI and PCE compared with the Core CPI and PCE which exclude energy and food prices – as if none of us use energy or food.
With the Fed predicting stagflation there’s little chance the fed funds rate will be cut. The options market predicts no chance until September and then a 66% chance that the Fed will hold steady. The FOMC will hang tight even though Jerome Powell will be replaced as Chair next month. If Kevin Warsh, the new chair, pushes hard for a fed funds cut the FOMC will ignore him and his reputation would be damaged since it’s obvious that would be against longstanding Fed policy.
The markets have built this into their models so there’s no reaction.
The METAR for next week is sunny.
Wendy
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
