Top Market Timing: Will Q2 Earnings Hold Up U.S Stock Valuations?

The U.S. Q2 earnings season is reaching its peak. So far, both revenue and net profit beats have exceeded recent years’ averages, marking the strongest start to an earnings season in years. The big question now: Can strong corporate earnings continue to support rising stock prices?

The chart below shows S&P 500 net profit margins and the Shiller PE ratio from 2021 to 2025 (Q2–Q4 2025 data are estimates).

As the chart indicates, corporate profit margins peaked in 2021, averaging 12.7%, a result of aggressive fiscal and monetary stimulus during the pandemic.

From 2022 to 2023, as stimulus faded and interest rates surged, profit margins declined sharply, dragging valuations lower. This caused a classic “double whammy” known as the Davis double-kill—both earnings and multiples contracted.

Since 2023, the emergence of AI tools like ChatGPT has sparked a recovery in corporate profitability. For 2024, the S&P 500 profit margin is projected to reach 12.2%, and may climb to 12.6% in 2025.

Indeed, S&P 500 valuations tend to track net margins quite closely. This powerful earnings season has pushed margins near peak levels, driving valuations to new highs. Today, the Shiller PE sits at 39x, even higher than its 2021 level.

This suggests markets expect robust and sustained U.S. economic growth, with corporate profitability either hitting new highs or staying near current peaks for an extended period.

Confidence is also visible in the credit markets. The spread between BBB-rated U.S. corporate bonds (the lowest tier of investment grade) and the broader investment-grade index is just around 20 basis points, near historic lows.

BBB/IG spreads are typically tightest when investors are most confident in growth, as these borderline credits are most vulnerable to downgrades in a recession.

However, current equity valuations require strong earnings to justify them. As more large-cap companies release results, the market will test whether these high margins are sustainable. With valuations now exceeding even the 2021 highs, further multiple expansion seems unlikely.

🔍 Is It All Just Tech?

Tech stocks often get blamed for inflating U.S. equity valuations. But is that really the whole story?

A closer look at all 11 sectors of the S&P 500 reveals a broader pattern of elevated valuations.

Yes, technology is the most overvalued sector, with a forward P/E of 30x, about 37% higher than its 10-year average of 21.9x.

But apart from healthcare, every other S&P sector also trades above its 10-year average.

For example, the industrial sector now trades at a forward P/E of 24.8x, 31% above its 10-year average of 18.9x—the second-largest expansion after tech.

Only the healthcare sector trades below its 10-year average, at 16.1x vs. 16.3x. It has underperformed by over three standard deviations and may be poised for a short-term rebound.

🧩 Final Takeaway:

In short, it’s not just tech inflating U.S. valuations.

DataTrek argues that today's market reflects far less recession risk than during the last decade. One may debate how much of a premium is warranted, but there's a reasonable case that U.S. large-caps should trade at richer multiples than history.

Aside from the 2020 pandemic shock, the U.S. economy has avoided recession this entire decade, despite facing two major disruptions (in 2022 and early 2025).

This strengthens investor confidence that a sharp downturn is less likely, and that valuations could drift higher as a result.