Monthly Investment Commentary: November 2025

Right now, the evidence points to the more comfortable path as earnings continue to outperform expectations. With most of the S&P 500 having reported third-quarter results, 82% surprised to the upside, and the index is on track to grow earnings by 13.1%, well above the expectation of 7.9% before earnings season began. Profit margins remain healthy (and growing) at more than 13%. Investor optimism looks justified.

Are Valuations Still Too High?

Valuations are high, but perhaps not as abnormal as investors fear. Market historians point to today’s cyclically adjusted price-to-earnings ratio (CAPE ratio—a measure of valuation that smooths out the temporary effects of economic cycles and short-term earnings volatility), which is at nearly 40x compared to a long-term average of about 18x since 1900.

However, looking at the data suggests that a change occurred at the end of the 1990s, which warrants attention. Over the last 35 years, the average CAPE ratio has increased to almost 26x, more than one standard deviation above its long-term average. So, what investors have considered average over the past 30 years would have felt astronomical to investors during almost any other period since 1900.

A significant shift occurred in the economic structure over the past three decades. Technology and profitability dynamics are the obvious culprits. Companies began generating more profits with fewer physical assets, boosting their margins, capital efficiency, and earnings. Markets rewarded that with higher valuation multiples.

Earnings Estimates Are More Challenging

Part of the challenge in valuing companies today also involves estimating future earnings growth. Analysts are clearly struggling to keep up, as even their estimates of current spending have proven to be overly conservative. That’s likely because artificial intelligence (AI) spending tends to be more “all or nothing” than the sales patterns of consumer goods. When the outcome is increasingly binary, there can be a wide gap between optimistic and pessimistic forecasts. As companies ramp up their adoption of and spending on AI faster than expected, estimates end up too low. If analysts can’t get the current quarter right, the long-term projections are nearly impossible to pin down.

Risks Remain

While stronger-than-expected earnings help ease valuation concerns, the AI buildout introduces new pressures. Part of what’s driven higher valuations over the last three decades has been the technology industry’s asset-light business models. As firms now spend more on computing power, a growing risk is that this could trickle through to margins. So far, that has not happened. With third-quarter earnings beating expectations, should investors be concerned about headlines warning that valuations are high? We take a closer look at whether valuations are stretched—and the ways they could adjust.

This does not mean that investors should not expect regular bouts of volatility. Throughout bull markets, high-profile prognosticators will commonly throw out the easiest of all market predictions: “The market will decline by 5%-15% over the next 1-2 years.” Why is this such an easy prediction? Because it’s almost always true. Since 1980, the market has experienced an average intra-year decline of about 14% each year, despite ending most years in positive territory.

Takeaway for Investors

The bottom line is that earnings growth continues to be the release valve for elevated valuations. Prices do not need to fall if profits continue to climb, and so far, companies are succeeding. Yes, risks remain, and investors should maintain a diversified portfolio for a wide range of outcomes, including both bear and bull cases. However, when fundamentals outpace expectations, it becomes more challenging to argue that valuations must snap back simply because they appear to be at uncomfortable levels.

Markets have a long history of rewarding genuine progress over tidy narratives. Currently, the progress is evident in the numbers. The narratives will catch up eventually.

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