MW Why stocks are rising despite weaker fundamentals

By Mark Hulbert

A rising valuation would be more understandable if there were less economic uncertainty

It's worrying that, despite deteriorating fundamentals, the stock market is higher today than at the beginning of the year.

Take corporate profits. At the beginning of January, the Wall Street consensus was that the S&P 500's SPX as-reported earnings-per-share for this calendar year would be $250.66 (according to Standard & Poor's). Now, just five months later, that consensus estimate has deteriorated nearly 4% to $241.33 - and even this lower estimate carries an even greater degree of uncertainty than normal.

Since the S&P 500 is slightly higher today than on New Year's, this deterioration means that the stock market has become even more overvalued than it already was.

A rising valuation would be more understandable if there were less economic uncertainty today than at the beginning of the year. That's because there's a strong inverse relationship between uncertainty and stock prices. Yet economic uncertainty is far higher today than in January, as you can see from the chart above plotting the Economic Policy Uncertainty $(EPU)$ index for the U.S. over the last five years.

In fact, the EPU recently rose to near-record levels last seen as the economy was shutting down at the beginning of the COVID-19 pandemic in early 2020. The chart below illustrates the inverse relationship between the stock market and economic uncertainty, which is significant at the 95% confidence level that statisticians often use when assessing if a pattern is genuine. Other things equal, therefore, we would have expected the EPU's large year-to-date increase to translate into a lower S&P 500.

A higher stock market could still be understandable if interest rates had fallen, since the present value of companies' future earnings goes up when rates fall. But rates have not fallen since New Year's. The 10-year Treasury yield is close to where it stood at the beginning of the year, and the 30-year yield is 20 basis points higher.

The picture that emerges is of a stock market that is increasingly dependent on investors' willingness to bet on equities regardless of fundamentals. Such a market is fragile, since investor sentiment is notoriously fickle.

Status of valuation indicators

The table below, which I update each month in this space, features a host of valuation indicators that have impressive track records predicting the stock market's subsequent 10-year real total return. You will notice that almost all of them are close to the bearish end of their historical ranges.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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May 27, 2025 12:34 ET (16:34 GMT)

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