Stock Indexes Are Approaching All-Time Highs, But Why Even The Most 'Diehard' Bulls Are Getting Nervous?

The stock market is facing a reality check after a strong rally.

On Wednesday, stock index futures traded mixed. Against the backdrop of renewed hopes for interest rate cuts and a U.S.-brokered ceasefire between Iran and Israel, S&P 500 futures edged up 0.02%, Dow futures dipped 0.1%, and tech-heavy Nasdaq futures rose 0.2%.

Although the S&P 500 is just a step away from its all-time high, its soaring valuations have unsettled some bulls. Widespread concerns linger over whether current stock price gains have outpaced actual corporate earnings growth.

Data shows the S&P 500's forward 12-month P/E ratio now stands at 22x—35% above its long-term average. Bank of America strategists tracked 20 valuation metrics, all indicating the index appears "expensive."

While analysts often caution that valuations aren't timing tools, the speed of the recent rally has left S&P 500 earnings growth struggling to keep up, unnerving even optimistic investors.

Fed Rate Cut Hopes: A New Lifeline?

Data model suggests S&P 500 earnings would need to grow 30% over the next year—assuming flat stock prices—to return to "fair value." Beyond earnings growth, Fed rate cuts could be another path to narrowing the gap between fundamentals and market prices.

Fed Chair Powell reiterated yesterday that policymakers needn't rush to adjust policy, but cooling inflation and weaker hiring could allow earlier rate cuts this year. His Tuesday congressional testimony—hinting cuts might come "sooner rather than later"—boosted sentiment. Investors await his Wednesday remarks for further policy clues.

“There is likely too much earnings optimism baked in for the back half of the year, and when you combine that with the fact that multiples are right near cycle highs, it puts even more pressure on earnings to exceed expectations,’’ said Kevin Gordon, senior investment strategist at Charles Schwab. “It’s not an impossible task, but it’s a high bar.”

Lingering Risks Amid Optimism

Despite concerns, Wall Street still hears bullish voices.

BMO Capital Markets chief strategist Brian Belski raised his year-end S&P 500 target from 6,100 to 6,700, citing broadening market participation, fading tariff fears, and expectations for clearer corporate guidance post-Q2 earnings.

Friday's PCE report—the Fed's preferred inflation gauge—will be closely watched. Economists expect May's annual core PCE (excluding food/energy) to rise slightly from April. Investors also seek signs of Trump's tariffs affecting prices.

Market participants continue monitoring the fragile Middle East ceasefire. No new attacks have been reported since President Trump accused Israel and Iran of violating the pause meant to create diplomatic space.