Markets ended the week lower on renewed concerns about extended valuations and weakening labor market conditions. Supreme Court hearings regarding President Trump’s tariffs and third quarter earnings also vied for investors’ attention.
On Tuesday, the heads of Goldman Sachs and Morgan Stanley said stocks could see a 10-20% pullback in the next 1-2 years. The comments were not terribly profound or dire but did add to renewed concerns about current valuations levels which are well above longer-term averages. By one measure, the Shiller Cyclically Adjusted PE (CAPE) ratio, stocks are now at their second highest level in 140 years, slightly below where they stood prior to the bursting of the tech bubble in 1999-2000.
On Wednesday, the Supreme Court heard oral arguments in a case challenging President Trump’s ability to levy tariffs under the International Emergency Economic Powers Act (IEEPA). Multiple justices appeared skeptical of the administration’s assertion that the President has the power to unilaterally impose tariffs without Congressional approval. Though the court typically takes months to announce its decisions, there is a sense it could act sooner given the issue’s importance. Should the court rule against Trump, he will still have other ways in which to impose tariffs, albeit in a more limited fashion.
Through Friday, 91% of companies had reported 3Q earnings. Thus far, 82% have beaten their estimates. According to industry group FactSet, consolidated S&P 500 earnings growth for the quarter is expected to be 13.1%, which would mark the fourth consecutive quarter of double-digit earnings growth.
