Market Sense
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It is no secret that private credit redemptions are rising as concerns about default risk hamper performance of this most beloved asset class. As the “Golden Age” of private credit normalizes, we may continue to see liquidity pressures rise and questions about underlying loan valuations emerge. As financial markets remain on guard for signs of eroding credit quality, spreads and equities can shed some light on contagion risks. So far public market spreads remain quite calm, but equities are wobbly, with BDCs struggling and insurance stocks showing some anxiety.
Credit Spreads Suggest Little Concern
Credit spreads offer a lens on the broader markets’ interpretation of credit quality and default risk, and across the board show no sign of material deterioration. While off their tightest levels reached in early 2025, even the lowest quality high yield bond spreads are still very tight compared to other periods of stress. Last year, when tariff policy was emerging, Caa spreads touched 850 bps, still well above the current level of 628 bps. On average, Caa spreads rose 584 bps in mid-cycle corrections like 2011, 2015, 2018, and 2022, and touched at least 1000 basis points in each instance.
Even Bloomberg Aggregate-eligible BDC credit spreads, arguably closest among categories to the private credit market, appear remarkably contained at this time. This aggregate has limited history, but at its peak in March 2023, the BDC spread touched 387 bps. Currently the spread of 251 bps is about equivalent to the spread touched in 2025.
Watch Banks and Insurance Stocks for Contagion Risk
Equity markets appear a bit more concerned than credit markets. BDCs, arguably a public market canary in the private credit coal mine, have taken a significant dive in recent months. Also, while there appears little sign of concern that strains from private credit will erode performance of banks, insurance companies are struggling a bit. History suggests both groups will likely sell off significantly if a broader risk of contagion emerges.
BDC equities (the S&P BDC index includes Ares, Bain Capital, Blackstone, Blue Owl, etc.) have struggled with a 23.7% decline from recent peak reached in July 2025 and are now trading below 2022 levels. Intriguingly, BDCs have been in a long-term bear market that dates back to the index peak prior to the financial crisis. The equities recovered to a post crisis peak in 2013 and struggled since then. Public BDCs are capital constrained as they cannot issue equity when their stock is below book value. The strong flows into direct lending have largely come through private BDCs as they can raise nearly unlimited amounts of capital. Nonetheless, the recent decline in equity values and increasing discount to NAV in public BDCs is likely partly due to an expected rise in defaults for the industry.
Movements in the value of BDCs usually coincide with movements in bank and insurance stocks as perceptions about default risk flow through to portfolio asset valuations. Concerns about private credit markets are so far dimming optimism in insurance companies but are not impacting the banking sector as much. Banks, represented by the KBW index, are down 10% from their peak in early February, but just back to levels last recorded in December. The group is still up more than 15% compared to this time last year. Insurance stocks, represented by the S&P Insurance Index, have dropped 10% from their peak in April 2025, and are down 7.2% from a year ago.
Notably, in the years prior to the financial crisis, banks, insurance and BDCs were very tightly correlated. The correlation between banks, BDCs, and insurance companies and BDCs averaged 0.88 in the three years before the financial crisis. The correlation has been nearly cut in half in the post-pandemic era. If private credit risk becomes a broader systemic risk, a tighter correlation should emerge.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Geopolitical risks may weigh on the outlook for stocks in the short run, with the S&P 500 now testing but so far holding a key support level at its 100-day moving average. Events in the Middle East have historically been absorbed fairly quickly by equities, unless oil prices spike and stay elevated. Stocks have been transitioning leadership toward commodity-sensitive sectors and value stocks so far this year, and rising oil prices affiliated with emerging Middle East supply constraints may encourage an extension of this leadership. Broadly, the risk of a market correction given elevated valuations is likely higher than the risk of recession, and oil prices will likely need to rise toward $100 before they upend the domestic economy.
Impact of Middle East Events is Anchored in Oil Signal
Geopolitical events in the Middle East can be disruptive to equity trends in the short run, but do not usually upend longer term bull markets unless oil prices spike and stay high, thus weighing on earnings and economic growth. We show oil price behavior around nine geopolitical events in the region since 1985 in the exhibit below. On average, oil prices fell 1.6% in the first month after all events, as initial spikes proved fleeting.
Notably, stocks struggled a bit in the short run but largely shrugged off geopolitical events in the Middle East within a few months. On average, 1-month after all events, stocks were up just 0.2%, but after 12 months, stocks averaged a return of 10.1%. The events were just one of many reasons for markets’ direction, but broadly, stocks were down in the first 6 months after 55.6% of the events. After 12 months, stocks were down after only 25% of these Middle East events.
Oil can be a relatively reliable indicator of impending stocks weakness when it surges. Generally, the higher and longer the oil price spike, the worse the experience for equities, even if there is no geopolitical event in the Middle East to spark the rise in oil prices. Notably, each of the recessions in the U.S. economy since the late 1990s (with the exception of Covid) has occurred after jumps in oil price of 50% or more. An elevated price of oil is not always the cause of these recessions, but most certainly contributes to weakness. Likewise, several of the non-recessionary corrections in equity markets – such as 2011, 2018 and 2022 – all occurred after oil price spikes
Watch Pricing Pressure, Rotation and Critical Supports
Supply chain turmoil in general is a risk we will continue to watch, as there is some evidence that supply-based inflation pressures may be emerging again, even without War in the Middle East. As detailed in our note, “Don’t Ignore Inflation Risk in 2026”, from February 6th, producer prices are already running too hot to ignore and imply risks to margin forecasts for non-energy US companies (particularly consumer companies) have emerged. If energy costs continue to accelerate because shipping lanes are closed and/or supply is threatened through attacks, forecasts for earnings growth may dim, taking more wind out of the sails of stocks. Migration toward commodity sensitive, defensive and value-oriented segments may likewise continue as earnings outcomes of this continued pricing pressure become more evident.
As for the market at large, the S&P 500 is losing seasonal support with earnings season now largely in the past, and war in the Middle East may add some degree of downside pressure in the near term. The index is retesting its 100-day moving average, a key level that offered support several times in the market’s recovery from “Liberation Day” last spring. A break of this critical support level, which coincides with the lower bound of the market’s range trade so far this year, could mean more significant short-term loss of momentum for the market. However, as long as the 200-day moving average remains upward sloping and breadth continues to improve, any breakdown should be considered a short-term correction within the longer-term bull trend.
Disclosure: HB Wealth is an SEC‑registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
So far this year, 18 of the 19 largest country markets in the world are outperforming the US equity market. This vast outperformance is better than any start to the year since 2005, when all 19 markets outperformed the US. Yet, a persistent valuation gap between the US and the rest of the world remains. Both growth dynamics and profitability shifts now imply this valuation gap should close, and this may drive international equity outperformance for some time to come.
US Growth Premium is Fading, and Leaves an Unseemly Valuation Gap
The growth momentum that favored the US in recent years may be set to fade in the near term. In 2023-2025, US earnings growth averaged 8.9% while global earnings growth averaged 3.7%. This helped make the case for US stocks. In 2026-27, US earnings are expected to grow about 14% on average annually, but global earnings are expected to rise at an average pace north of 20%. Likewise, the IMF projects world growth will accelerate more than 3% over the next two years while US growth should average just over 2%.
Elevated relative earnings growth for the US drove an improvement in relative price performance for the region that may prove unsustainable in an environment where international equity earnings are set to grow at a faster pace, particularly considering that concentration in US stocks has become extreme relative to actual share of growth. US stocks are now more than 60% of the market cap of the global investable equity market according to MSCI, well above levels justified by the country’s share of economic or earnings growth. As of the end of last year, US GDP was just 26.9% of world growth, and US earnings were 33.8% of global earnings. Put another way, non-domestic economies are nearly 3/4ths of global GDP and non-domestic earnings are nearly 2/3rd of global earnings, but they command less than half of global equity market cap.
US equity valuations are now very elevated relative to valuations for global stocks, despite evidence of shifting near term growth momentum. At 21.5X forward 12-month earnings, the S&P 500 trades a full 6X above non-domestic equities, represented by the Bloomberg World Index excluding the US. This is 2.7x above long-term average, and even higher than the spread that emerged in 2021, when U.S. stocks last reached extreme valuations. The spread to emerging markets is still especially wide, with the Bloomberg Emerging Markets Index P/E still sitting at only 13X.
US Valuation Premium Too High for Margin to Support, May Fade with AI-Theme Profitability
U.S. valuations appear somewhat bloated even considering that US margins are higher than most of the rest of the world. Net income margins of ASEAN equities are materially higher than US net income margins, and Canada and Latin American corporate margins are likewise in line with US margins. Yet, all of these markets trade at significant discount to US stocks. Meanwhile, all world equity markets with the exception of Japan and India trade at discounts to levels that would be implied by net income margin.
Perhaps even more importantly, US valuations appear to presume that US profitability and capital efficiency will remain extremely strong, even in the face of eroding hyperscaler cash flow amid ever-increasing capital spending plans. US price to-book ratios appear about in line with current ROE and ROIC, but also assume high ROE and high ROIC in the US will persist, even though those measures are heavily skewed by the highest market cap stocks (aka, the Mag-7). U.S. price-to-book is 2X price to book for the rest of the world, supported by the fact that ROIC and ROE are also about 2X the rest of world on a market cap-weighted basis. However, on median, US ROIC and ROE are much closer to measures for the rest of the world. Median US ROIC and ROE are both about 1.3X rest-of-world medians, while US median P/B is about 1.5X rest-of-world median P/B. The distorted ratios suggest US market valuations are heavily dependent on a sustained elevated level of profitability for the market’s largest stocks, which are generally companies tied to the AI theme.
After years of concentrated gains in the US, valuations became over-extended, not only in absolute terms, but relative to global counterparts. This was in part due to elevated growth and profitability of US companies. However, the valuation gap between US and global stocks may now be in the early stages of closing. Global stocks outperformed the U.S. equity market in 2025 and are continuing to do so in 2026. Shifting relative growth prospects and changing assumptions about profitability and capital efficiency among the largest US companies appear likely to keep closing the gap as the year progresses.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Trade policy may remain a source of anxiety for markets for some time to come. Contrary to consensus beliefs that tariffs were 2025’s issue, the Supreme Court ruling and resulting new tariff plans from the President suggest uncertainty is back and may challenge market assumptions for robust cyclical recovery in 2026. Renewed near term uncertainty is not because tariffs are higher, but because levels are temporary, and subject to more changes. The President’s immediate reaction to try a different tariff route may be an additional signal to acknowledge. Though tariffs have yet to impact the trade deficit meaningfully, the quick reaction to institute replacement tariffs shows commitment to the tariff cudgel. This may be the bigger source of long-term tension for the economy and financial markets, and as the President continues to double down on tariffs as a mechanism to close the trade gap, it may increase the appeal of non-US investment alternatives.
Tariffs and Trade Pressures on the Rise
The Supreme Court has ruled 2025’s “reciprocal” tariffs, issued under the International Emergency Economic Powers Act (IEEPA), as illegal, reversing many, but not all, of the tariffs put in place last year. Markets initially reacted positively to the ruling, but that reaction was short-lived because the President’s reaction to the ruling injected more policy uncertainty into financial markets. The President announced new tariffs nearly immediately after the ruling, and the replacement solution – for a broad tariff of 10%, perhaps increasing to 15%, to complement still-standing industry-specific tariffs – reduces policy clarity in the short run. The new tariff is issued under Section 122 of the Trade Act of 1974 and must be ratified by Congress after 150 days.
The tariff level itself is only marginally different than the average tariff already in place in aggregate, though it does reduce the pricing pressure on products coming from countries like China, India and Brazil, where rates were significantly higher than average. Overall, tariff policies implemented in 2025 resulted in the highest average tariff rate on US goods since 1941. The average tariff rate reached 16% last year, up seven-fold from its multi-decade low of 1.2% reached in 2008. Though the new tariff rate (plus industry specific tariffs) may not be materially higher than before, it is uncertain and subject to future change, and this is one source of discomfort for markets. Additional options for industry and country-targeted tariffs could also still emerge, perhaps dependent on Congress’ take on the new across-the-board rate.
However, we also found out last week that the US trade deficit didn’t budge with the weight of tariffs last year. This may be the bigger problem.
The President’s stated intention with tariffs is to stimulate domestic onshoring, production and jobs via trade deficit adjustment. However, this adjustment process is so far slow in coming. Last year, despite the tariffs, US companies continued to import just as much as they did in 2024, with the total amount of goods imports at $3.35 trillion in 2025 versus $3.27 trillion in 2024. This stubbornly wide deficit indicates little change in the behavior of US or international companies has yet emerged from trade policy shifts. And while that may suggest to some that the tariffs have been ineffectual, that does not appear to be the case with the President. Instead, the President appears more likely to double down on tariffs. His commitment to rebalance the trade deficit via tariffs became even more evident with his response to the Supreme Court ruling. If we are correct in this interpretation, tariffs may keep getting higher, rather than lower. Ever higher tariffs are almost assuredly not “in the price”, particularly after post-liberation day reversals.
What Will It Mean for Asset Prices?
The renewed climate of tariff uncertainty has already resulted in market volatility and may also result in a reversal of some of the leadership shift that emerged in the stock market in recent months. Small caps and equal weighted large caps have outperformed large cap stocks since their November lows, partly on the premise that US cyclical recovery is emerging, and partly on the presumption of a more certain operating environment. But those smaller cap, value-oriented cyclical groups do not have exports to offset import uncertainty, nor the pricing power to generally pass along changes in import costs. Until some clarity emerges regarding Congress’ impression on the President’s new tariff agenda, presumptions of growth for domestic cyclicals may be challenged.
Longer term, a more volatile policy landscape emerged with trade policy shifts in the US in 2025, and that challenging policy landscape appears likely to persist. This may continue to result in better performance for nondomestic assets, particularly as the rest of the world seems even more committed to trade with one another via expanding trade pacts and agreements. Presumptions that the US market will remain the most investor and business friendly are challenged with trade policy volatility, and capital may continue to diversify to other global areas of stability as a result.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Earnings season is normally an uplifting experience for the S&P 500, but that has not been the case in recent weeks. On the surface, earnings appear fine, with the index on pace to post about 13% growth in earnings compared to the same period a year ago, and revenue rose almost 8%, the fastest pace since 2022. About 75% of companies posted better results than analysts forecast at the start of the season. However, evidence has emerged that the quarter just passed may be as good as it gets for the next year, at least for S&P 500 topline growth. Momentum in revenue has been a tailwind for stocks since early 2023, but if analysts are correct, revenue growth may have peaked in the fourth quarter of 2025 for the large cap index, and for cyclical stocks within the S&P 500. Meanwhile, small cap stocks are picking up steam as revenue recovery appears increasingly likely to emerge. This mix creates a mixed picture for the outlook, and results for now in a churning equity market at large, with small caps and defensive sectors simultaneously outperforming.
As Large Cap Momentum Peaks, Small Caps May be Revving Up
S&P 500 revenue growth may have hit peak pace in 4Q 2025, at 8.1% YoY, the fastest growth since 2022, and much faster than the average pace of growth of about 5% since 2023. Revenue growth above 8% on the index is historically somewhat rare outside of recession-recovery periods. In the pre-pandemic cycle, the S&P 500 posted growth of greater than 8% just one time, in the fourth quarter of 2018, the quarter that proved to be peak growth for the index. On average from 2014-2019, the index posted about 3% revenue growth.
Unlike large caps, which may be reaching a peak pace, small caps have a longer runway for improvement in revenue growth. The divergence between small cap and large cap revenue trends is a unique feature of the post-pandemic corporate experience. Small cap revenues have failed to reach lift-off since they went into recession in 2022, and while the large cap index was recovering over the last three years, small caps failed to post persistently positive growth. If the analyst community is correct, small caps may just be entering a more sustainable growth phase. Small cap earnings season is still underway, but the group is on pace to record 3.7% growth in 4Q, the first quarter of above 2% growth in three years. If consensus is correct, small cap revenue growth may stall temporarily in 1Q, but pick up momentum through the remainder of 2026.
Large Cap Defensive Sectors May Start to Outpace Cyclicals
While revenue growth for the S&P 500 as a whole might stall out at a relatively heady pace of growth this year, there is an internal rotation in leadership that is set to emerge. After trailing cyclical sector growth since 2024, defensive sectors in large caps may start to show some revenue improvements in 2026. Analyst forecasts currently suggest that year-over-year cyclical sector revenue growth may have peaked in the fourth quarter, but defensive sector revenue growth is expected to continue to accelerate for at least the next few quarters, explaining some of the rotation that has been evident in U.S. large caps so far this year.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Recent data on durable goods orders and industrial production suggest an industrial recovery may be emerging for the economy, but industrials stocks may be expecting more of a full industrial renaissance. Large cap U.S. industrials have reached a new all-time high valuation relative to the S&P 500 index and now command a P/E greater than the S&P 500 technology sector.
S&P 500 Industrials’ forward P/E, at 26.5X, matches sector P/E in 2021, when earnings were impaired by the pandemic, and at 1.24X the index, is higher than at any point in the last 30 years. EV/Forward EBITDA, Price-to-Sales and Price-to-Book ratios for the sector are also at levels beyond records of the last 30 years. Forward P/E ratios for two-thirds of the stocks in the sector, and every industry within industrials except for the airlines and professional services industries, are now above 20X.
The only other times industrials’ relative P/E ratio spiked to near the current record were instances in which the Fed funds rate had dropped to 1% or lower. This time, the global defense spending boom, hyperscaler capex commitments, tax reform and easy monetary policy are sparking an extraordinary amount of stock market optimism in the outlook for an industrial profits acceleration in the years ahead. As a result, the group price-to-forward 3-year earnings multiple has topped 22X for the first time since 1999.
Disclosure: HB Wealth is an SEC registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Recent rotation has helped resolve some of U.S. large cap stocks’ valuation excesses, but risks remain to the downside for U.S. multiples. Large cap growth’s sales multiple is still near its all-time high, at about 6X, and growth’s earnings multiple may still be at least 15% too rich to value. The eye-popping growth premium is not the only evident excess in stocks, however, for now large cap value stocks are also trading very near all-time high valuations. These very high expectations have started to weigh on U.S. large cap growth stocks and may remain a problem for U.S. large cap returns overall in the near term.
U.S. large cap growth stocks have underperformed value counterparts by 11% so far in 2026 and 18% since their relative peak in October of last year, helping to resolve some of the abnormally large valuation premium that developed for growth in 2025. However, the premium for large cap growth stocks is still well above long term norms, even after the style’s recent correction. At a forward P/E of 25.7X, Russell 1000 growth trades 7.5X above Russell 1000 value stocks’ P/E of 18.2X. The growth premium was more than 75% in October, when the growth index touched a multiple of 31.1X, nearly equivalent to its 2021 absolute peak. On average since the end of the tech-bubble and until the pandemic (2003-2019), Russell 1000 Growth traded at a 25% premium to its value counterpart, but the current P/E premium is still 40%.
The price-to-sales ratio shows an even larger valuation extreme for growth, and a bigger valuation gap between growth and value stocks. Growth stocks still command a premium to value that is even higher than either the tech bubble or the 2021 peak, with the growth index trading nearly 6X sales, 4X above its value counterpart. At the peak in the tech bubble, the Russell 1000 growth index P/S ratio was 5.5X, or 4.2x turns above the value ratio of 1.3X. And in the 2003-2019 period, the growth index traded at an average premium of 0.76X to large cap value stocks. Growth stocks may face a reasonably high probability of valuation compression, particularly if any sales disappointments emerge.
Though the growth premium is still most bloated, it is worth noting that value stocks are also trading at a premium to pre-pandemic norms. Current P/Es of 25.7X for Growth and 18.2X for Value are both well north of long-term averages, and price-to-sales ratios for both growth and value are very near long-term peaks. Excluding the tech bubble and the post-pandemic period, the Russell 1000 Growth index has traded at an average P/S multiple of 2.0X, or 0.7X above value’s average multiple of 1.3X.
Herein lies the potential problem for U.S. large cap stocks – it may be tough for valuations to press much higher unless companies can positively surprise elevated expectations. This may limit price growth to the rate of growth of fundamental improvements. Growth stocks’ premium is extreme and thus may be most at risk of correcting if disappointments emerge, but it also may be unlikely that value stocks can re-rate much higher to offset any broad index drag from growth multiples. High multiples overall may limit U.S. large caps price appreciation potential, as they imply abnormally strong fundamentals are already embedded in expectations. Given such extended valuations, large cap stocks should be expected to rise, at best, at the pace of earnings growth.
Disclosure: HB Wealth is an SEC registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
After outperforming for most of the last three years, growth stocks have been struggling relative to value stocks since October of last year. However, the broad indices may be masking a longer-term shift in the styles’ performance. Pure style indices and a look beyond large caps both suggest the growth style may be further past its relative peak than is commonly believed.
The Russell 1000 growth index hit a new high in October of last year relative to the Russell 1000 value index, leading to the conclusion that growth stocks at large were still making new highs in comparison to value. However, a look under the hood of the popular style indices reveals a different take – that growth outperformance was not enough to recover the style’s losses to value in 2021-2022. Growth stocks may have merely managed by their late 2025 peak to fall just short of their 2020 high relative to value.
Russell’s pure value and pure growth indices offer a finer take on style performance, as they have no overlapping constituents with one another. (On average, 25-30% of the constituents in the Russell 1000 growth index are also included in the value index. Thus, the pure indices can give an arguably clearer read on styles.) These indices show growth’s peak relative to value was all the way back in 2020 – the October 2025 peak in the Russell 1000 pure growth index relative to its value counterpart was slightly lower than the 2020 peak.
The small cap indices show a similar signal, though it is even clearer. In small caps, both the broad and the pure indexes show small cap growth peaked relative to small cap value in 2020, with the 2023-2025 rally resulting in a lower high for growth by comparison.
Disclosure: HB Wealth is an SEC registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Elevated fiscal spending, easy monetary policy, trade tensions and geopolitical strains may imply inflation risk is re-emerging in 2026. This could take consensus views, focused more squarely on potential job losses as AI-initiatives are implemented, off guard this year. Materials and energy are two of the top performing sectors in large cap stocks year-to-date, as commodity prices surge. Services companies, in particular, are reporting elevated prices. Historically, inflation is only problematic for stocks in two instances – (1) when consumer prices accelerate faster than 3.5%, and (2) when producer prices rise faster than consumer prices. Consumer prices are not rising so quickly that they are likely to compress market valuations (tech stocks are doing that job quite nicely anyway!). However, producer prices are now rising faster than consumer prices. This suggests the profits outlook may be more troubled than is commonly believed.
While in the intermediate term, there may appear little risk of a broad inflation breakout, a few indicators are starting to flash yellow with respect to inflation. Notably, energy and materials stocks are having their best start to the year in some time, as the combination of monetary and fiscal easing in 2025 may be starting to impact pricing and activity in 2026. Both sectors recorded their strongest 1-month gains in January since October 2022 and June 2023, respectively.
Meanwhile, businesses report services prices remain elevated. Though both services and goods prices have been slowly increasing from their 2023 lows for more than two years, services costs are still higher than any point in the pre-pandemic cycle. All 17 industries in the ISM services index reported an increase in prices paid in January, suggesting remarkable breadth in pricing pressure for services.
And importantly, the spread between producer and consumer prices is suggesting pricing pressure may be starting to emerge, and this may throw a bit of cold water on margin forecasts for the S&P 500. The spread between these indicators can operate as a proxy for company pricing power. Historically, when core producer prices accelerate faster than core consumer prices, particularly when producer price growth is above 3%, companies struggle to pass along costs. This struggle manifests in margin weakness for S&P 500 companies.
Our chart shows the spread plotted against index margins over time. Each time PPI accelerated faster than CPI, index margins reached a near term peak. This last happened in 2022, but it also happened in 2018, 2015 and 2011. In each period, markets weakened for various reasons, but in all periods, profitability of U.S. companies slumped a bit under the pressure of elevated inflation.
These inflation signals should be watched carefully as the year progresses, for it is early to suggest inflation is yet a problem for stocks. Pricing issues may need to deepen before they become a major drag on stocks or trouble the economy. From a broad perspective, stocks valuations usually do not react to inflation pressures until CPI accelerates beyond 3.5%. This reflects the historical tendency for the Fed to allow inflation to run slightly hotter than the loose 2% stated target. Over the long run, CPI has averaged 3%, and equity market valuations average north of 20X when inflation is below 3.5%, as is still the case. Above 3.5%, the market has historically experienced a material downdraft in valuations.
Disclosure: HB Wealth is an SECregistered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
U.S. equity markets’ rotation out of technology has come a long way over the last few months, and the sector is now trading at just a 10% premium to the rest of the market. The sector’s earnings may justify a modest premium to the index, but only if growth can remain very strong. If relative earnings momentum fades as the consensus expects, it may suggest more valuation pressure for the group, and if valuations for tech – the largest sector in the index by market cap – stall or fall, a continued struggle for stocks is likely. Over the long run, the S&P 500 posts stronger returns in periods when tech stocks’ multiples are rising, and that seems unlikely as unusual post-pandemic economic trends normalize.
After leading the S&P 500 with a rally of more than 70% from the spring 2025 low to the October 2025 high, tech stocks have sold off 11.5%, pushing the sector’s forward P/E multiple back to 23.6x from its peak above 30X. This is still higher than 86% of history back to 1990, and comparable to levels recorded in 2002, as the tech bubble was in the process of deflating. However, it has started to close the sector’s valuation gap to the rest of the index. The former 40% tech premium has been cut to 10%, but it is still above ex-bubble norms – tech has historically traded in line with the index except during the tech bubble and during the AI-craze. Notably, the premium developed during the tech bubble reached significantly higher extremes and took years to normalize. Tech’s premium is much lower this time but is nonetheless still creating some tumult for stocks as it normalizes.
Loss of momentum in the AI trade that powered tech to new high valuations is the culprit behind the latest decline, in similar fashion to the same issue that plagued tech in early 2025. However, back then, tech sector valuations recovered smartly because tech earnings growth proved more resilient than the rest of the index. Tariffs, while less onerous than anticipated, effectively stalled out the budding recovery in the rest of the index in 2025 while tech enjoyed another leg of AI investment-led growth. With tech proving a reliable growth engine, particularly by comparison, capital pushed back into the segment, elevating valuations.
Neither of these trends – tariffs stifling ex-tech growth or tech getting another leg up from AI – appears likely to emerge this year. Ex-tech earnings growth is expected to continuously accelerate this year as tech earnings growth hits a peak in the current quarter.
This may mean tech sector valuations will continue to stall out. During the period between the financial crisis and pandemic, tech sector earnings growth was about 20% faster than ex-tech sectors of the S&P 500 on average. Since the pandemic, tech’s earnings growth has been 50% stronger than the rest of the index, with average annual growth of 15.1% since the end of 2020 compared to ex-tech’s average growth of 9.8%. The tech growth phenomenon resulted in valuation expansion for the group, as ever-stronger earnings growth was continually experienced, and extrapolated. The consensus now sees a smaller growth premium as likely to start to emerge this year and next. If this proves correct, the premium that has become the norm in the post-pandemic world is no longer justified.
Considering the degree to which tech stocks have corrected over the past three months, the broad market is holding up reasonably well. Nonetheless, market returns can be expected to be muted when the tech sector valuations are not expanding. On average, when tech stocks de-rate, the broad market has struggled with lower returns. Since April 1990, when tech valuations fell, the average monthly S&P 500 return was -1.8%. In contrast, when tech stocks’ multiples rose, stocks post stronger monthly returns that averaged 3.2%. Over the last three months, even though tech stocks have dropped more than 10% and valuations have dropped about 7X, the index has posted below average, but nonetheless slightly positive average monthly returns. Rotation to the other groups in anticipation of strengthening earnings trends ex-tech has helped shelter the index from tech’s struggles. Without tech sector enthusiasm, these groups will need to continue to show strong recovery prospects to keep equities afloat.
Disclosure: HB Wealth is an SEC registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.