By Ian Salisbury

Anyone who missed the rebound in the stock market may want to think twice before plowing money into shares at today's prices.

Over the past six weeks, the stock market has been on a wild ride. While the S&P 500 dropped more than 10% in the week following President Donald Trump's April 2 tariff announcement, Trump began walking back his controversial plan, triggering a surge in shares, a week later.

He suspended the "reciprocal" tariffs on virtually all countries, imposed on "Liberation Day," until July 9. But a 145% tariff rate on China remained in effect.

On Monday, the Trump administration retreated from that as well, saying it struck an agreement with China that will lower tariffs for 90 days while the nations hammer out a longer term deal. Since then, the S&P 500 has rallied about 4%, putting it 3.8% above where it stood on April 2.

The rally has to be a relief for anyone that held on through the chaos, but people who sold their stocks may be wondering what to do now. One big problem: April's sell off was so sharp in part because investors were already worried about elevated price-to-earnings ratios.

With stock prices back up, that problem hasn't gone away. "The S&P 500 is priced for near perfection," wrote DataTrek founder Nicholas Colas, in a note Wednesday. "No recession, no geopolitical shock, no real surprises at all. That may sound strange given the last month's volatility, but here we are."

During the selloff, the S&P 500 traded as low as 18 times what Wall Street forecasts for 2025 earnings. But since the market's rebound, the valuation has snapped back to above 21 times. That is the highest it is been in a decade, except for late last year and a span during Covid-19, when the government was temporarily pumping enormous amounts of money into the economy, according to DataTrek.

Colas says, with some caution, that large-cap U.S. stocks are investors' best option despite the warning signs.

"'This time is different' may be the four most dangerous words in investing, but without them it is hard to justify owning the S&P 500 here given its lofty valuations," he wrote. The prospect that new technologies such as artificial intelligence will reshape the economy could ultimately justify today's prices, he said.

"We remain positive on U.S. large caps," Colas wrote.

At Goldman Sachs, market strategists wrestled with the same problem, but came up with a different answer. In a research note Wednesday, analysts acknowledged that markets seem to be viewing April's trade-war chaos as a blip, but said signs the U.S. economy is starting to weaken pose an underappreciated threat to stocks.

"There remain significant risks that as hard data deteriorates, investors put a higher probability on a recessionary outcome leaving markets vulnerable to another correction," the Goldman strategists wrote. "Our asset allocation team has a neutral position on equities and remain overweight cash."

In addition to cash, Goldman urged investors to use one of the playbook's oldest tactics: diversification. The weakening U.S. currency has lifted dollar-denominated returns on European stocks so far in 2025, the bank noted, adding investors can expect further gains if the dollar continues to sell off. Those in both Italy and Germany are above 27%.

The weaker dollar, not to mention tariffs, could make exports from countries such as Germany more expensive in the U.S. But that won't necessarily weigh down European stock prices. While the U.S. is Germany's largest single trading partner, only about 10% of German exports go to the U.S.

Indeed, Europe may offer overlooked bargains. Despite all the attention lavished on the U.S. Magnificent Seven tech stocks, a basket of European banks has actually outperformed U.S. megacap tech shares going back to the start of 2022, according to Goldman Sachs's calculations.

Three years ago, the sector was struggling badly, as lower interest rates cut into margins, and many banks needed to raise capital and cut dividends, the firm pointed out. Today, the stocks have snapped back, helped by low defaults on loans, among other factors.

"Few noticed their recovery," the strategists wrote.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 14, 2025 13:28 ET (17:28 GMT)

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