Overly Complacent?

With nearly seven months of 2025 complete we’ve continued to see the S&P 500 and the Nasdaq plough through several difficult issues to date as they’ve both recently reached all-time highs in late-July. This almost seems to be expected and perhaps even common place at this point. With that as a backdrop there are some things worth noting and thinking through as we approach the Fall season and the fourth-quarter.

From the April 8th tariff induced low, we’ve seen the S&P 500 go up by 28.7% and it’s up 9.4% year-to-date. These numbers are despite the DeepSeek Monday in late January that shook the AI and Data Center buildout themes, on again, off again tariffs, the US bombing of Iran, multiple threats to fire Fed Chairman Powell and extreme levels of volatility in the Spring. Yet, here we are with the market putting up a very good first seven months of the year. When we step back and think about it, you could say that this reflects the US economy’s durability and at least it’s short-term outlook over the next three-to-six months. Indeed, the Atlanta Fed’s GDP Now forecast for the second-quarter stands at 2.4% and Bloomberg’s consensus is at 2.5%. Unemployment remains very low at 4.1% and consumer spending remains quietly resilient even as some of the first tariff related price increases have already been implemented by companies. So, in that light it makes sense that we’ve had a decent-to-good equity market performance so far this year.

But we also see the market’s multiple of 23.5x reflective of this persistent durability. This is relative to its ten-year average of about 20.2x.

Source: Advisors Capital Management, the 10-year average P/E ratio of 20.2x shown in the chart reflects the period from 2015 through mid-2025. This timeframe provides a full economic cycle that includes the post-COVID recovery, inflationary period, rate hikes, and the current AI-driven market rally—making it a relevant benchmark for comparison against the elevated 23.5x multiple

As with our ever-increasing amount of national debt, this equity market seems to have built up some level of complacency because of its seeming persistent ability to overcome obstacles. This complacency is also worth noting because it can lead to overconfidence and money chasing fast returns instead of being invested with the intent of a long-term focus. Buying stocks or crypto simply because they go up is the definition of chasing returns. Momentum and high-beta have been the two strongest factors in the market’s returns this year, further demonstrating that money is going where things are “hot.”

And investors perhaps have grown complacent around the tariffs. August 1st is days away and the President has said that they will go in place on that date with no time-line extensions like the 90-day we saw on April 9th and then on July 9th to Aug 1st. (Should we believe him this time?) Duties paid by US importers have jumped to an average rate of more than 13%. This is more than five times where they were last year according to Bloomberg Economics estimates. This amount is likely to grow as we move past Aug 1st and then we’ll have to see how this affects corporate profits in the Q3 earnings reports that we’ll start seeing in October. The point being that the market seems to have reacted as if the “all clear” has been sounded regarding tariffs. Further compounding this issue is that the weaker US dollar will cause some upward pricing pressure on all imported goods. So, this is a big TBD in the weeks ahead as we get into Q3 earnings season.

Regarding the healthy market returns for the first seven months of year – AI related names, aerospace & defense companies, and electrical power generation companies have captured the market’s attention and have performed the best this year. That’s not surprising. However, somewhat beneath the surface and not capturing a lot of attention within the market’s good performance, we see that the banks have done very well, up 16.5% YTD compared to the S&P 500’s 9.4%. They’ve been benefiting from an improved M&A environment, increased trading, and a positively sloped yield curve has improved net interest margins. Importantly, their credit marks are also looking solid. This perhaps reflects the overall economy that keeps surprising most market watchers.

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