Stocks hit all-time highs near the end of the third quarter. The S&P 500 Index ended the third quarter at 6,688, with a price to earnings ratio (P/E) of 22.8x. This is a lofty P/E compared to the 30-year average of 17.0x. However, it is not as high as the peak of technology euphoria on March 24, 2000, when S&P 500 stocks traded at a P/E ratio of 25.2x.
The J.P. Morgan chart below shows the index hitting a potential new inflection point. This chart has been showing new inflection points many times the past four years; it is hard to tell yet if we are actually there. As we saw in a previous quarterly newsletter, markets can still rise from all-time highs. In fact, from 1950 to today, 30.4% of all-time highs acted as a market floor. A market floor is defined as an all-time high from which the market never fell more than 5%.
Better than expected second quarter earnings, coupled with a drop in interest rates from the Federal Reserve Open Market Committee, contributed to the rise. In fact, according to a Factset report dated October 3, 2025, analysts increased earnings per share estimates in aggregate during the quarter for the first time since fourth quarter 2021.
While analysts are increasing estimates, consumer sentiment is almost to a 50 year low. The J.P. Morgan chart below tracks consumer sentiment since 1971. Logic might say that if consumer sentiment is low, the stock market would not perform very well. However, this caution can actually be a good sign. The average subsequent 12-month S&P 500 stock return following the nine sentiment troughs was 24.1%. The 10 times sentiment was at a peak the S&P 500 only returned 3.9% the following 12 months.
Don’t count stocks out yet. While caution is warranted at these lofty prices, economic indicators point toward the potential for ongoing earnings gain.
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