S&P 500 impressive growth but facing challenges from high valuations and trade uncertainty

The S&P 500 closed October with three consecutive weeks of gains, temporarily setting a record high around 6,920 points before slightly retreating to the 6,840 area by the end of the week.

This upward momentum reflects a combination of expectations for Federal Reserve rate cuts, stronger-than-expected corporate earnings, and investors’ “risk-on” sentiment during the year-end season.

However, this optimism also comes with clear warnings, as valuations are now significantly higher than long-term averages, while the macroeconomic foundation still contains various uncertainties.

Following its policy meeting on October 29, the Federal Reserve cut interest rates by 25 basis points, bringing the target range down to 3.75%–4.00%, in line with market expectations.

Chairman Jerome Powell emphasized that this is not the beginning of a prolonged easing cycle and that future decisions will depend on inflation and labour market data. At the same time, the September CPI rose 3.0% year-on-year, slightly down from 3.1% in August, indicating that price pressures are cooling moderately.

This helps sustain expectations that the Fed may maintain a more accommodative monetary stance in the first half of 2026 — a strong supporting factor for large-cap equities within the S&P 500.

From a fundamental perspective, the Q3 2025 earnings season delivered better-than-expected results. According to FactSet (November 1, 2025), about 70% of S&P 500 companies have reported earnings, of which 77% beat EPS expectations and 62% exceeded revenue estimates. Average earnings growth reached 10.7% year-on-year, marking the fourth consecutive quarter of double-digit growth. However, the average EPS surprise was only 5.3%, below the five-year average of 6.6%. In contrast, the overall net profit margin reached 12.9%, a slight improvement from 12.8% in Q2.

These figures reinforce confidence that the U.S. economy remains resilient despite two years of monetary tightening. However, the index’s valuation has now far exceeded historical averages, with the S&P 500’s 12-month forward P/E ratio currently standing at 22.9–23.1x, significantly above the five-year average (19.9) and ten-year average (18.6).

In addition to monetary policy, tariff and geopolitical factors have become new variables that significantly affect the outlook for the U.S. stock market. Following a bilateral meeting between President Donald Trump and President Xi Jinping in Busan on October 30, both sides announced a framework for an “expanded phase” trade agreement, which includes the U.S. temporarily suspending additional tariffs on certain Chinese electronic and textile goods, in exchange for Beijing’s commitment to tighten exports of fentanyl precursors and increase imports of U.S. agricultural products — according to Reuters.

Although this marks a notable de-escalation compared to tensions in Q2, these agreements are not yet a sign of an end to the trade conflict between the two nations, as key provisions on technology, semiconductors, and export controls remain unresolved.

From an economic perspective, the Atlanta Fed’s short-term GDPNow model shows Q4 2025 growth around 1.6% q/q annualized, down from 2.3% in the previous quarter. This slowdown reflects weaker household consumption after the mid-year shopping season, along with stagnant business investment as capital costs remain high.

The combination of more flexible trade policy and signs of slower but non-recessionary growth has created a moderate environment that helps the S&P 500 maintain steady momentum. For multinational corporations in the S&P 500, particularly those in the technology, industrial, and global consumer sectors, easing tariff tensions could help stabilize supply chains and lower import costs, thereby improving profit margins in the first half of 2026.

However, certain risks remain. If Washington restarts another round of tariff hikes or increases export controls on chips, the semiconductor industry — which accounts for more than 28% of the Information Technology sector’s weight in the index — would come under adjustment pressure.

Thanks to growing expectations of an upcoming easing cycle, I still believe that, in the long term, the S&P 500 could continue to extend its rally to higher levels.

In the short term, over the next few weeks, supportive factors such as expectations of continued Fed dovishness, favourable November seasonality, and temporarily subdued tariff risks could help the S&P 500 maintain modest gains and even test the psychological 7,000-point threshold. However, with the forward P/E already above 23x, the market is currently very sensitive to any unexpected signals from economic data or Fed communication. A 3–5% correction could be considered healthy, especially as active funds rebalance their portfolios after the earnings season.