Strong earnings keep stock-market bulls in charge. What could bring the rally to a halt?

U.S. stocks have mounted a strong comeback, with the S&P 500 and the Dow Jones Industrial Average wiping out their 2025 losses last week. But lurking behind that optimism is one of the market’s old problems: Stocks are pricey once again.

Within just a few weeks, investors went from trimming exposure to risky assets to chasing the relief rally on solid first-quarter earnings and easing trade tensions between the U.S. and some of its major trading partners. As a result, stocks are back to being expensive, which raises questions about how far this rally can really go from here.

The forward price-to-earnings (P/E) multiple of the S&P 500 SPX, calculated by dividing its current price by Wall Street analysts’ consensus estimate for its earnings per share (EPS) for the next 12 months, surged to 21.5 as of Thursday afternoon, from 18.02 on April 8. The forward P/E ratio was also at the highest level since Feb. 28, and above the five-year average of 20.25, according to Dow Jones Market Data.

U.S. stocks on Friday wrapped up a strong week on Wall Street as investors breathed a sign of relief after officials from Washington and Beijing agreed on a 90-day pause in their tariffs, easing concerns that escalating global trade tensions could hurt the world’s two largest economies. What’s more, a batch of softer-than-expected inflation data also showed tariff policies haven’t added to price pressure in the U.S. economy — at least for now.

Also see: Stock futures fall after Moody’s strips U.S. of its top credit rating

The S&P 500 rose 5.3% last week, while the Dow DJIA jumped 3.4%, after both indexes clawed back to positive territory for the year to seal a stunning comeback just over a month after they had tumbled to recent lows amid President Donald Trump’s aggressive and far-reaching tariff plans. The tech-heavy Nasdaq Composite COMP also popped 7.2% to score its best week since April 11, according to Dow Jones Market Data.

“A lot of this rally was short-covered by hedge funds and institutions that were very convinced that the economy was in trouble and the market was going down,” said Andrew Slimmon, head of applied equity advisors and lead senior portfolio manager at Morgan Stanley Investment Management. But in fact, the solid first-quarter earnings from American companies showed “the fundamentals looking backwards didn’t validate,” he told MarketWatch in a phone interview.

Indeed, with 92% of the S&P 500 companies releasing quarterly results as of Friday, 78% of which have reported a positive EPS surprise, while 62% of which have reported a positive revenue surprise. The blended annual earnings growth rate for the S&P 500 in the first quarter is 13.6%, which marks the second-straight quarter of double-digit earnings growth reported by the large-cap benchmark index, according to FactSet data.

See: The ‘Magnificent Seven’ are back in the stock market’s driver’s seat — but are they still a buy?

Despite the widespread earnings beats in the first quarter, Wall Street analysts still seem to be spooked by what company management said on the conference calls about the rampant uncertainty and pessimism on how Trump’s tariff policies could squeeze corporate profit margins.

Of all the companies that conducted earnings conference calls over the past month, 411 have cited the term “tariff” or “tariffs” during their calls for the first quarter. This marks the highest number of the S&P 500 companies commenting on tariffs on quarterly earnings calls over the past 10 years, according to FactSet data.

As a result, full-year earnings expectations for the S&P 500 have softened over the past month, with Wall Street now seeing the 2025 consensus EPS estimate at around $263.40, down from $271.05 in mid-March, according to FactSet data.

See the problem here? An elevated forward P/E multiple combined with downgrades to earnings expectations for the S&P 500 suggests stock prices are becoming even more stretched.

Adding to the concern is the tension between stocks and the U.S. government debt, which has resurfaced as Treasury yields gained traction last week with the 10-year rate BX:TMUBMUSD10Y on Monday breaking the 4.5%-level for the first time since February. The yield on the 30-year Treasury bond BX:TMUBMUSD30Y also hovered right below the 5%-level, threatening to hurt the stock market’s return.

Despite backing off slightly from those levels on Friday, both the 10- and 30-year yields still rose over 6 basis points last week. It was the largest weekly yield gain since April 11, according to Dow Jones Market Data.

See: Powell signals return toward inflation-first strategy

However, the high valuation of the S&P 500 may also suggest that the U.S. economy is expected to avoid a recession, according to Yardeni Research.

“Usually in recessions, the forward P/E of the S&P 500 falls into the single digits. It hasn’t done so this time because the stock market isn’t pricing in a recession. Neither are industry analysts, according to their latest EPS estimates,” said a team of Yardeni’s strategists led by Ed Yardeni, president and chief investment strategist.

“During the previous bear market, the forward P/E bottomed at 15.1 on October 22, 2022. That too was a relatively high P/E and occurred because the most widely anticipated recession of all times was a no-show,” they said. “History may already be repeating itself in the performance of the stock market and the economy so far this year.”

See: Stock-market recovery suggests equities must fall this far to spark a ‘Trump put’ or pivot

Another way to assess the health of the economy is through the lens of consumer strength. Last week, retail giant Walmart Inc.’s WMT quarterly results beat Wall Street estimates on every key metric, but the company will still push prices higher because they said they are not able to absorb all the pressure “given the reality of narrow retail margins.”

“There’s consumer pressure and consumers have been through a really difficult inflationary period,” said Marta Norton, chief investment strategist at Empower. “There’s enough discernment in the consumer that companies need to be careful in pricing.”

That makes earnings from other major retailers some of the key market-moving events this week in an otherwise quiet calendar on the economic data front. Home Depot Inc. HD is due to report its quarterly result on Tuesday before the opening bell, followed by Lowe’s Companies, Inc. LOW and Target Corporation TGT on Wednesday morning.

It’s worth noting some of the consumer stocks — much like Big Tech — have already traded at pretty lofty levels. The S&P 500’s consumer staples sectorXX:SP500.30 is one of the top performers among the large-cap index’s 11 sectors this year, up 6% while the S&P 500 has risen 1.3% year to date, according to FactSet data.

“Investors who turn to these areas for defensiveness might find that there’s very little margin of safety for those types of consumer companies,” Norton told MarketWatch via phone on Thursday. “That doesn’t mean they won’t do well if markets collapse, but I have less enthusiasm about their future given where their valuations are.”