I hope you are all well and enjoying the summer. It’s been hot in Asheville, but we’ve had enough rain over the past month to keep things green.
The stock market is once again near all-time highs. And when markets reach these levels, it’s natural to wonder whether they’ve simply gotten too far ahead of themselves. So I thought it would be useful to step back and look at what’s actually happening underneath the market, rather than trying to predict where it goes next.
Corporate earnings have been particularly strong. FactSet’s latest data show S&P 500 earnings growing at nearly 38% year-over-year in the second quarter. But that headline number deserves some qualification. Alphabet’s (Google) results included an unusually large gain that significantly boosted the overall figure. Excluding Alphabet, earnings growth was still approximately 26%—still quite robust. Revenue growth was about 14%, and importantly, all 11 sectors were reporting year-over-year revenue growth. That kind of breadth is encouraging.
Now, it’s fair to note that the comparison to last year deserves some context. The second quarter of 2025 followed the April “Liberation Day” tariff announcements, when uncertainty caused analysts to reduce their earnings expectations significantly. So some of today’s year-over-year growth reflects a more favorable comparison to a depressed baseline. But corporate earnings in 2025 ultimately held up better than many expected at the time. In other words, I don’t think it would be accurate to dismiss today’s earnings growth simply as a tariff comparison. The underlying fundamentals appear solid.
The economy is also still growing, though not dramatically. Real GDP increased at a 1.5% annualized rate in the second quarter, following 2.1% growth in the first quarter. That’s not especially rapid expansion, but it is still positive growth. At the same time, there are clear signs that economic momentum is moderating.
There’s one more development worth noting. Late last month, the U.S. Treasury and Bank of Japan coordinated an intervention in foreign exchange markets to support the yen, which had weakened substantially against the dollar. This matters because a weak yen has encouraged significant borrowing in Japanese yen at low rates, with those borrowed funds deployed into higher-yielding assets globally—a strategy known as the yen carry trade. When the yen strengthens suddenly, as it has, it forces those positions to unwind, which can create ripple effects across Treasury markets, credit markets, and equities. I’m monitoring this situation closely because it’s another variable that could introduce volatility, particularly if stress spreads to leverage-dependent positions in U.S. markets. For now, things appear contained, but it’s another variable adding to the backdrop we need to monitor.
When you put all this together—moderating growth, foreign exchange volatility, and the domestic picture—things get more nuanced. Inflation has improved—July’s CPI increased 3.4% from a year earlier, down from 3.5% in June, with core inflation at 2.5%—but it hasn’t disappeared as a concern. Those numbers are moving in the right direction, but they remain above the Federal Reserve’s 2% target. And while corporate earnings are strong, the market is not inexpensive. FactSet reported a forward price-to-earnings ratio of 19.6 at the end of July—below the five-year average of 19.9 but above the ten-year average of 19.0. Investors can earn meaningful yields on high-quality fixed-income investments these days, which makes the price we pay for stocks an important consideration.
So does the market being at an all-time high, by itself, mean we should be worried or make a change? I don’t think so. There are genuine fundamental reasons supporting today’s market levels, particularly the strength of corporate earnings and revenues. But there are also legitimate reasons not to become complacent. Economic growth has moderated, inflation remains above target, interest rates are still relatively high, and some of the earnings strength remains concentrated in technology and companies benefiting from artificial intelligence investment.
Our job isn’t to predict which of these forces will win out. It’s to continually evaluate the evidence, assess the quality of the companies we own, make sure we’re comfortable with the prices we’re paying for those companies, and ensure the level of risk in your portfolio is appropriate for your situation. That’s exactly what we’re doing.
If the market’s recent strength—or anything else you’re seeing in the financial news—has you wondering whether you should be doing something differently, please let me know and we’ll find a time to chat.
