MW Yes, stock-market valuations are high. But this Wall Street veteran outlines 2 scenarios that could keep the rally going anyway.

By Joseph Adinolfi

For U.S. stocks to continue serving up double-digit gains over the next year, valuations will likely need to climb, says DataTrek's Nicholas Colas

Stocks are expensive right now - but they could always get more expensive.

There is no denying that U.S. stocks are expensive right now.

The S&P 500 SPX was trading at 22.7 times forward earnings as of Thursday's close, meaning investors are forking over a hefty premium relative to history to buy stocks at these levels, according to Dow Jones Market Data.

Of course, this is still below the most recent pandemic-era peak: At one point, the index's valuation climbed to nearly 24 times expected earnings.

Today's valuations are also well below levels seen during the days of the dot-com bubble. But they are still high enough to make some investors uneasy, particularly as President Trump's tariffs threaten some companies' profit margins. And for all of the hype surrounding artificial-intelligence technology, it has yet to blossom into the corporate moneymaker that many are hoping for.

That being said, for stocks to continue racking up strong gains over the next year, investors will need to get comfortable with multiples climbing even higher, according to DataTrek co-founder Nicholas Colas. In commentary shared with MarketWatch, Colas outlined four scenarios that could send the S&P 500's forward valuation as high as 26 times forward earnings over the next 12 months. The index hasn't traded above 26 times forward earnings since right around the peak of the dot-com bubble in March 2000, Dow Jones Market Data show.

"To make a genuinely bullish call on U.S. large caps here, one must therefore believe the S&P [500] can trade for 24x or even 26x forward earnings. These valuations imply 8.6 to 17.7 percent price returns over the next year," Colas said in commentary shared with MarketWatch.

For both scenarios where the S&P 500 could trade at 24 times earnings and 26 times earnings, Colas envisions two ways this could play out.

The scenarios

Colas breaks down two scenarios - one in which technology stocks drive all of the index's gains, and one where gains accumulate evenly across the S&P 500's 11 sectors.

Of the two, Colas said the scenario where tech stocks do all of the heavy lifting is more straightforward, given that tech is the only sector currently benefiting from a strong tailwind in the form of artificial intelligence.

To get the S&P 500 to a multiple of 24 timesforward earnings, Colas calculated that the tech sector XX:SP500.45 would need to see its multiple grow to 34.5 times - a 19% increase from its current multiple of 29 times forward earnings.

Already, three of the sector's five largest companies by market capitalization trade above that level: Microsoft Corp. $(MSFT)$, Broadcom Inc. $(AVGO)$ and Oracle Corp. $(ORCL)$ Two others - Nvidia Corp. (NVDA) and Apple Inc. $(AAPL)$ - are pretty close.

Oracle's historic move from earlier this week shows that more technology stocks could see big gains due to AI, Colas said.

In Colas's alternative scenario, other sectors would need to see bigger multiple expansion. Tech stocks would only need to trade at 31.5 times forward earnings, while consumer discretionary XX:SP500.25 would need to trade at 31 times, compared with 28.5 times today, and communication services XX:SP500.50 would need to climb to 22 times, compared with its current valuation of 21 times forward earnings.

Financials XX:SP500.40 would also need to lend a hand, with the sector's valuation climbing to 18 times forward earnings, compared with 16.6 times today.

For cyclical sectors like financials to deliver a bigger contribution to overall index returns, investors would need to see a steady pattern of Federal Reserve interest-rate cuts over the next year. This should cause the Treasury yield curve to continue to steepen, which would help boost banks' lending income. The U.S. economy would also need to remain healthy.

The S&P 500 narrowly missed what would have been a fifth straight day in the green on Friday as the index finished lower, FactSet data showed. It had tallied its 24th record close of 2025 on Thursday. The Nasdaq Composite COMP, however, managed to clinch its 25th record close of the year, while the Dow Jones Industrial Average DJIA pulled back after finishing above 46,000 for the first time ever on Thursday.

-Joseph Adinolfi

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

(END) Dow Jones Newswires

September 12, 2025 16:39 ET (20:39 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.