Market Insights 7/27/26
Observations & Insights – July 27, 2026
Markets Modestly Lower
U.S. stocks pulled back last week, with the S&P 500 falling -1.3% and the Nasdaq dropping sharply by nearly -3% amid a severe rout in semiconductor, AI, and large-cap tech shares. Conversely, the energy sector rallied as oil (WTI crude) jumped 9.3% due to escalating U.S.-Iran tensions, while defensive sectors like health care and staples outperformed
Key Points
- Stocks pulled back as energy spiked on Mideast tensions.
- Brent crude oil spiked over $100bbl on Friday.
- Tech earnings came in above expectation, but concerns surround Capex spending.
- Equity valuations are high, supported by earnings growth.
- Fed meeting on deck this week.
Observations: Energy Shocks Spike Bond Yields, Upsetting Global Markets
Escalation in the Middle East conflict and further shipping disruptions in the Persian Gulf and Red Sea lifted oil prices. U.S. crude was trading around $90 per barrel on Friday afternoon, up from roughly $82 at the end of the previous week and $69 as recently as early July. Brent crude spiked over $100 per barrel on Friday, before settling around $98.
Prices of U.S. government bonds fell for the second week in a row, sending yields higher ahead of a U.S. Federal Reserve meeting. The 10-year U.S. Treasury peaked around 4.70% on Thursday—the highest in more than a year and a half—before closing at 4.68% on Friday. Yields of 2- and 30-year Treasuries also surged, reaching 4.33% and 5.17%, respectively, on Friday.
Bond yields pushed higher in key developed markets outside the United States. In the United Kingdom, 10-year government bond yields rose above 5.00% while the equivalent German yield hit its highest level since 2011. Japanese yields recently approached levels last seen in the 1990s.
The recent rise in bond yields is affecting the U.S. housing market, as mortgage rates have climbed to the highest level in nearly a year. The average 30-year fixed mortgage rate rose to 6.58%, according to Freddie Mac’s latest weekly update. The average rate had briefly slipped below 6.00% in February, sparking forecasts of a rebound in home sales, which have recently been in a slump.
The Trump administration on Friday imposed new tariffs on dozens of the United States’ biggest trading partners, including the European Union. The new 10.0% to 12.5% duties follow the expiration of a 10.0% global tariff that the administration had implemented in February 2026 after the U.S. Supreme Court struck down a prior tariff regime.
Earnings season forecasts were adjusted sharply higher after a mega-cap tech company reported better-than-expected results. As of Friday, analysts projected that earnings for S&P 500 companies rose an average 37.9% in the second quarter, up from a 24.8% forecast at the end of the previous week, according to FactSet. The latest forecast was based on the roughly one-quarter of S&P 500 companies that had reported results as of Friday, plus projections for those that had not yet released numbers.
In addition to more quarterly earnings reports, the new week will bring a U.S. Federal Reserve policy meeting that concludes on Wednesday. Investors will be looking for more clarity from new Fed Chair Kevin Warsh. On Thursday, investors will assess an initial estimate of second-quarter GDP growth and June’s inflation rate, as measured by the Personal Consumption Expenditures Price Index.
Insights: Are Valuations Too High?
We write about equity valuations quite a bit, but outside of our industry it is rare that valuations are mentioned at a market or index level. Typically, when valuations do come up, it is for the wrong reasons, because they are high. We are seeing more and more valuation-focused comments today as the market continues to charge higher. As we have written about many times, as long as that charge higher is met with growing earnings, then valuations stay in check, and the runway for future returns remains long. Historically, it is better to consider relative valuations – i.e., how cheap or expensive asset classes or sectors are relative to the overall market. This assumes investors are not using valuations to be in or out of the market (which they should not do), but today we want to look at one measure of absolute valuations that has garnered concern in some areas of the market.
Robert Shiller created the CAPE, or PE10, ratio and was awarded a Nobel Prize for “empirical analysis of asset prices,” which included the predictability of this CAPE ratio. This metric is an adjustment of the standard price-to-earnings ratio that is widely looked at. CAPE divides the current inflation-adjusted price of the S&P 500 by the past 10-years of average inflation-adjusted earnings to arrive at what is intended to be a “smoother” average than a standard trailing 12- or forward 12-month price dvided into earnings number. Shiller’s work was based on the predictability of this ratio for market returns 10-years forward. While that is good in theory, 10-years is a long time in the market, and not something that should impact an investors willingness to invest. No valuation methodology is perfect, and CAPE is far from it (it does not account for earnings growth or the discount rate, can be artificially inflated or depressed by write-downs, the mean-reverting average keeps going higher, etc.), but let’s dive into what high valuations can mean going forward and what investors should do about it (if anything).
Looking at history (back to 1900), it is no surprise that a low CAPE ratio implies higher forward returns, and vice versa. If it did not, no one would be looking at this ratio! However, there are many things to glean from these numbers as displayed below. First is the middle line – the market returns over rolling 1- and 5-year periods – always a good reminder that a 10% return that is positive more than 90% of the time over 5-year periods is something we all benefit from. The concern comes in when valuations (as measured by CAPE) are elevated. Periods above a ratio of 20 and also above 25 see lower expected returns going forward – but not that much lower. A 7% annualized return over 5 years is still a cumulative return of over 40%, and returns are positive over the next year and 5 years nearly three-fourths of the time. Those numbers are simply too positive to ignore, and definitely not worth missing by being out of the market. And of course, this is just for the S&P 500 – typically when valuations get elevated in one asset class, market leadership rotates.
What about all-time highs? If you take the CAPE ratio back to 1900 and then look at the numbers at each new all-time CAPE high, forward 1-year returns are remarkably still positive, nearly 72% of the time (with a 7% average)! As you stretch that over 5 years, returns do diminish, but in just 32 observations of the CAPE at all-time highs, forward returns are still positive over 3-5 years 40% of the time. Today’s CAPE ratio is still below all-time highs.
The most important takeaway from high valuations and so-called bubbles (which we discussed a few of weeks ago) is this: valuations can stay high for a long period of time (indeed they can always go higher) and stocks follow earnings over time. The latest reports from US companies of second quarter earnings show earnings are set to grow close to 38% on a year over year basis. These are real numbers. We believe, based on our observations of the companies and indexes we are invested in, that most analysts are behind in their estimates of future earnings growth. This is one reason we raised our end of year target on the S&P 500 last week to between 7850 and 8100.
Final Thoughts
Valuations are high, so what do you do? You remain invested, but maybe take a second look at what you are invested in. We are always doing that in portfolios – balancing momentum, growth, valuations, and expectations of economic or policy impact across the positions we are invested in. Each has different time frames and considerations. The old saying always rings true – time in the market beats timing the market every time.
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Thank You,
Jeff
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Jeffrey S. Markewich
Wealth Advisor
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