Stocks see strong comeback with latest earnings, but increasing valuation and trade tensions raise concerns.

From Yahoo Finance: 2025-05-18 17:46:00

U.S. stocks have made a strong comeback, wiping out 2025 losses. However, stocks are back to being expensive, with the S&P 500’s forward P/E ratio surging to 21.5, the highest level since February. Despite soft inflation data, concerns remain about how far this rally can go amid trade tensions.

Solid first-quarter earnings have led to a 5.3% rise in the S&P 500 last week, marking a stunning comeback from recent lows. However, ongoing tariff uncertainty has spooked analysts, with a record number of companies mentioning tariffs on earnings calls. Earnings expectations for 2025 have been downgraded, signaling concerns about stretched stock prices.

Treasury yields rose last week, with the 10-year rate breaking 4.5%. Despite pulling back slightly, yields still increased over 6 basis points, posing a threat to stock returns. However, the high valuation of the S&P 500 may suggest the economy will avoid a recession, according to Yardeni Research.

Consumer strength remains a key indicator of economic health, with Walmart’s strong earnings beating estimates. Major retailers like Home Depot, Lowe’s, and Target are set to report earnings this week. Consumer stocks, similar to Big Tech, are trading at lofty levels, raising concerns about future performance given their high valuations.

Read more: Strong earnings keep stock-market bulls in charge. What could bring the rally to a halt?