7000

“There’s a point at 7000 RPM… where everything fades.  The machine becomes weightless.  Just disappears.  And all that’s left is a body moving through space and time.  7000 RPM.  That’s where you meet it.  You feel it coming.  It creeps up on you, close in your ear.  Asks you a question.  The only question that matters.  Who are you?” 

–Carroll Shelby, Ford v Ferrari, 2019 

Capital markets are being pushed to their limits.  Investors are being driven to an edge where the forces of fundamentals, technicals, total return, liquidity, speculation, and risk are all converging.  U.S. stocks, bonds, precious metals have all become weightless, collectively soaring to the upside seemingly driven almost purely by momentum and flow.  Investors are thinking less about the “why” behind their capital allocations, instead giving over control and embracing the reality that markets appear to be instinctively rising no matter what.  We can feel it coming.  It’s where we will meet it.  As the S&P 500 stands poised to accelerate past 7000 for the first time between now and the end of the year, it will be asking you a question.  The only question for investors that will matter.  Who are you?  

Ghost in the machine.  We should not ignore the resoundingly strong fundamentals that continue to underpin today’s capital markets.  For all of the thinking about the inevitability of recession over the last few years, the U.S. economy continues to motor.  As shown in the chart below, “Blue Chip” economists forecasts (blue line below) are now scrambling to catch up to the reality that the data (green line) has been implying for months now.  Expect more of the same as we continue through 2025 Q4 to the end of the year. 

The economy drives corporate earnings, which is the fuel for higher stock prices, and here the picture looks even better.  As reported earnings (GAAP) on the S&P 500 have grown by more than +13% annualized in the first half of 2025, and they are forecasted to continue rising at a faster +13-16% rate through the rest of the year and into the first half of 2026.  

And what about what has been the primary downside risk confronting investors for much of the 2020s, which is the threat of sustainably higher inflation?  Expectations remain fully contained with the latest 5-Year Breakeven Inflation Rate reading still drifting below 2.4%.   

Put all of this together, and the S&P 500 remains poised to drive straight past 7000 through the remainder of the year and go like hell into 2026. 

“You promised me the drive, not the win” 

–Ken Miles, Ford v Ferrari, 2019 

Full throttle.  So what could possibly go wrong?  A lot. 

Let’s begin with the S&P 500 chart right above with the S&P 500 trading as much as +12% above its previous all-time highs set in February just before the tariff induced cascade to the downside.  As it stands today, the S&P 500 is trading 3% above its medium-term 50-day moving average (blue line).  It’s trading 12% above its long-term 200-day moving average (red line).  And it’s floating 16% above its ultra long-term 400-day moving average (pink line).  Put simply, we as overdue for a sustained correction if not an extended period of consolidation in about a year.  And we should not be at all surprised to see the S&P 500 drop by more than 1000 points over a one to three month period from its recent all-time highs, and it would represent nothing more than garden variety mean reversion as part of a continued long-term uptrend dating back more than three years now.  But given that we have mostly flown past the historically turbulent period from mid-August to mid-November with flying colors, we should reasonably expect that the U.S. stock market is going to continue to run hot through Thanksgiving and the Santa Claus rally period into early January 2026.  As a result, the magnitude of the next eventual garden variety, regression to the mean stock market correction is likely to only get bigger before we finally hit the brakes. 

OK.  But we can probably handle that.  A generation of investors since the Great Financial Crisis and through COVID have been conditioned over and over and over again to power right through any such stock market potholes.  “Buy the dip” is the go like hell call that comes over the team radio, and this aggressive discipline has been rewarded time and time again for nearly two decades now.  So why would next time be any different? 

Well, we cannot ignore the fact that the S&P 500 Equal Weighted, the S&P 400 Mid-Cap, and the S&P 600 Small Cap indices are all still trading below their late 2024 highs.  Hell, U.S. small caps are still trading below their 2021 highs from four years ago on a price basis.  And this is all under the surface of a U.S. stock market is higher by nearly +28% on the headline S&P 500 Index year to date.  This is a VERY top heavy market.  Yeah, but we all know this.  And we all know that the top heaviness is concentrated in technology, which now makes up a gobsmacking 36.25% of the S&P 500.  Throw in former tech titans like Google, Meta, Visa, and MasterCard and tech adjacent high flyers like Amazon and Tesla, and we’re up over 51% on tech concentration in today’s market.  As a historical reference, any time over the last century that a single sector rose above 20% of the entire stock market, trouble has followed.  Think oil stocks in the late 1970s and early 1980s, tech stocks at the turn of the millennium, and financials in the mid-2000s – all ended badly and stretched on for an extended period.  And we’re at 36% to 51% on tech today.  Go like hell! 

It’s also tough to look past stock market valuations.  The S&P 500 Index is now trading at 30.7 times training 12-month as report earnings.  Only once before in the past 155 years has the U.S. stock market P/E ratio rise above 30 amid expanding growth (in other words, it wasn’t because of a collapse of the “E”, but the rise of the “P” in the P/E ratio).  This was in late 1998 and 1999.  Dubious company.  Of course, the lightning fast retort is the following: “dot.com stocks back then weren’t making any money, but stocks today are highly profitable!”.  Indeed, but Cisco Systems, Microsoft, Intel, Dell Computer, Hewlett Packard, and scores of other tech companies back then were also highly profitable back then too, yet they plowed into the barriers for more than a decade after revving so hot in the late 1990s.  And the fact that tech stocks today are trading at 42 times earnings versus their two decade historical average of 22 times earnings – nearly double the price – is also tough to look past. 

Something worries me even more today, however, which is the deep interconnectedness that has evolved between all of these high flying tech companies.  By now you’ve almost certainly seen at least one of those pictures that looks like a plate of spaghetti showing the capital flows within the AI ecosystem.  This is awesome as long as the spending continues to flow.  But here’s the problem, and it is the same problem we saw during the Great Financial Crisis nearly two decades ago.  Once any segment of the ecosystem starts to break, once a single car crashes on a blind chicane, the tech wreck can quickly pile up and compound on itself.  We all as investors must keep a very close watch on this front in the weeks and months ahead. 

One last point getting back to stock market valuations.  If you want a guaranteed derisive eyeroll from in-the-know investors, start talking about the Shiller CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio, or effectively the 10-year P/E on the S&P 500 Index).  I can barely restrain my own eyes darting to the ceiling as I type this point.  But here’s the thing we cannot ignore.  First, let’s get this out of the way.  The Shiller CAPE ratio is NOT a market timing instrument.  It’s not about what’s going to happen tomorrow, next week, or next year.  Instead, it is an ultra long-term indicator.  It gives us a measure of what we should reasonably expect over the next ten years.  What is the CAPE approaching 40 telling us today?  That the expected return on the S&P 500 over the next 10-years should come in around 1.6%.  The only time this reading has been lower was in 2000, 1970, 1937, and 1929.  It’s been four out of four in its past 10-year market return predictions.  But the more important point to note is that when generating a 1.6% annualized return over a ten year period, it almost never comes in a grinding slog of successive 1% to 2% returns each year over ten years.  Instead, it almost always comes with years that are down -20% to -40% followed by years that are up +15% to +30%.  A price chart from 1997 to 2012 is what it typically looks like. 

It is a stock market that is filled with opportunity.  But you don’t just get to buy the SPX and forget it.  Instead, you’ve got to work at it. 

And what will be the likely catalyst that finally ends the race in today’s stock market?  Not recession.  Inflation.  It’s not here yet, but it’s potentially looming increasingly close down the racetrack.   

“Ohh!  Giddy-up, giddy-up” 

–Ken Miles, Ford v Ferrari, 2019 

Driven to win.  And this is where we turn the tide on the terminal ending of the film.  Today’s stock market is one that is FILLED with attractive total return opportunities.  Technology, consumer discretionary, and communications services (TCC) own the day the same way that Technology, media, and telecom (TMT) owned the day back during the high flying tech bubble days.  But what remains overlooked amid today’s ongoing tech dominance is that virtually every other segment of the U.S. stock market is trading at some of the deepest discounts we have seen in years if not decades.  Health care, energy, materials, consumer staples, real estate, mid-caps, small cap, developed international, selected emerging markets that don’t start with “C” and end with “hina”, selected pockets in fixed income, commodities including but not limited to the recently raging gold and silver trade – all offer some of the most attractive expected total return opportunities on a go forward basis that we’ve seen in quite a while. 

So even if a rise in inflation or some other unanticipated risk blows the engine of the burning hot tech trade, the good news is that capital markets remain stocked with attractive ways to strategically allocate on a risk-adjusted return basis for years to come. 

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.

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Eric Parnell, CFA Chief Market Strategist

Eric Parnell is the Chief Market Strategist for Great Valley Advisor Group. Eric applies his expertise in finance and economics to manage multi-asset portfolios, mitigate risk, deliver advice that promotes informed decision-making, and facilitate investors achieving their short-and long-term investment goals. He leads the GVA Asset Management platform overseeing the management of asset allocation models for GVA advisors and their end clients.

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