U.S. equities are closing out the second quarter on a strong note, with the S&P 500 hovering near all-time highs as wealth managers and investors position portfolios around anticipated Fed rate cuts, easing trade tensions, and potential fiscal expansion from Washington.
Yet under the surface of this rally, elevated valuations and muted volatility may be sending a different signal: markets are pricing in more earnings growth and economic strength than current fundamentals support.
As earnings season kicks off July 15 with results from JPMorgan Chase, attention will turn quickly to whether corporate profits can validate current price levels. “The U.S. market remains the clear global outperformer—driven by strong earnings momentum, macroeconomic resilience, and ongoing excitement around AI,” said Charu Chanana, chief investment strategist at Saxo Bank. “But with valuations stretched, the coming earnings season needs to support the second-half rebound narrative. If it doesn’t, we could see a sentiment reset.”
The S&P 500 recently closed at a record 6,201 and now trades at 22.8 times forward earnings—its most expensive level since 2003. By comparison, it is now priced richer than both the Nasdaq 100 and the Russell 2000, according to Goldman Sachs Global Investment Research. “There’s a lot of optimism priced in,” said Louis Navellier, CIO of Navellier Calculated Investing. “Some of that is likely being pulled forward in anticipation of rate cuts. But there’s also a notable disregard for geopolitical and policy risks.”
Consensus estimates project second-quarter earnings for S&P 500 companies will rise 5.9% year-over-year to roughly $529 billion, based on LSEG data. That growth, however, falls short of the 10% price gain the index has posted since March. Meanwhile, nearly half of the index’s 11 sectors are expected to post zero or negative earnings growth. Of the sectors that do grow, about 82% of the earnings increase is expected to come from just two: communication services and information technology.
For full-year 2025, analysts see earnings growth of 8.5%—a notable downgrade from the 14% forecast at the start of the year. At that pace, valuations imply a forward P/E ratio closer to 23.4, leaving little room for disappointment.
For advisors constructing portfolios, the disconnect between market pricing and fundamental expectations warrants scrutiny. The equity risk premium—the excess return investors expect for holding stocks over risk-free Treasuries—has shrunk to just 2.4 percentage points, according to WisdomTree. That’s the narrowest margin since the early 2000s, offering little cushion against surprises.
Volatility metrics also reflect a sense of investor complacency. The Cboe VIX, at 16.62, implies daily moves of about 65 points on the S&P 500 in July—well below the 105-point daily swings observed in April. Still, not all advisors view that as a red flag. “Markets tend to climb a wall of worry, but record highs often lead to more record highs,” said Clark Bellin, president and CIO at Bellwether Wealth in Lincoln, Nebraska. “Momentum can persist longer than people expect—even though pullbacks are always possible.”
For advisors managing client expectations in the second half of 2025, the challenge will be how to deploy fresh capital in an environment where valuations are elevated and many investors missed opportunities during the spring dip. “We’re being cautious about entry points,” Bellin added. “But we also don’t want to be on the sidelines if earnings do surprise to the upside.”
The risk-reward balance is delicate. For equity allocations, concentrated earnings growth in a narrow band of sectors raises questions about diversification and sector exposure. While tech and communications have led the charge, broader participation is lacking, and any earnings disappointment from those leaders could destabilize sentiment quickly.
In this environment, RIAs and wealth managers may want to consider selective rebalancing, emphasizing quality companies with strong balance sheets and defensible margins. Dividend growth strategies, active risk management, and an openness to international equities—particularly in regions trading at lower multiples—can offer important offsets to domestic valuation risk.
While soft landing hopes, AI-driven productivity gains, and a potential rate cut cycle are still supportive, the bar for continued upside is rising. As always, client conversations should anchor around long-term goals, while acknowledging the limitations of extrapolating recent performance into future expectations.
Heading into earnings season, advisors should be ready to assess not just whether companies are beating estimates—but whether the tone of guidance supports the optimistic market narrative. If earnings fail to deliver, a repricing may follow—and clients will look to advisors for clarity and direction.
