Here’s the problem with waiting for more attractive market conditions to buy stocks.
“The market waits for no one,” Morgan Stanley’s Mike Wilson wrote in his research note last month.
“Equity markets trade in the future where information is imperfect and uncertain,” he added. “Just like they discounted much of the uncertainty we are now seeing in the headlines, they are now looking ahead to the resolution of that uncertainty and better visibility on the rolling recovery that began a year ago.”
Many of the folks struggling to make sense of this year’s market action continue to make the mistake of assuming that stocks are supposed to reflect what’s happening today, when in reality they represent expectations for the future and the premium investors are willing to pay for that future.
To be fair, while stock prices may not appear to reflect heightened uncertainty, stock valuations certainly do.
As the S&P 500 fell 9% peak-to-trough earlier this year, the forward price-to-earnings (P/E) ratio dropped 18%.
And while prices have more than recovered those losses, the P/E ratios remain off their highs, suggesting investors are paying a lower premium for future earnings.
“That’s not complacency, in our view, but a market that did a substantial amount of work to price in the numerous risks that appeared over the past 6 months — Iran war/oil spike, AI disruption and private credit concerns being the most significant,” Wilson wrote on Wednesday.
But how can stocks be higher in price but also cheaper in valuation?
It’s simple: Earnings are looking up!
While we were all distracted by the recent bout of market volatility, reported earnings have been better than expected and estimates for future earnings have been going up.
When the E in P/E is rising faster than the P, it’s possible to get an outcome where the P is up while the P/E is down. That’s just math.
The chart below from Wilson illustrates this dynamic nicely. The blue line (earnings) has outpaced the yellow line (price), causing the grey line (valuation) to trend lower.
To Wilson’s point about the market waiting for no one, this has been very true about expectations for future earnings.
Something I’ve grown to appreciate with age is that time doesn’t stop. And earnings tend to go up with time — at least, that’s been the trend for S&P 500 earnings for at least 90 years, according to this long-term log chart from Deutsche Bank.
That means if you’re waiting for cheaper valuations to buy stocks, time is your enemy. Because as time passes, earnings tend to go up. That creates the condition where you’re at risk of paying up when you finally get what you think is an attractive valuation.
You could sit on the sidelines, fretting over how valuations appear unattractive. Maybe they do eventually meet your definition of a reasonable valuation.
But remember: Publicly traded companies will never stop pursuing earnings growth. It’s something that’s been going on since the beginning of capitalism. (Read more about that here and here.)
So, the longer you wait for that attractive valuation to come, the greater the risk that earnings are much higher and you find that attractive valuation comes with a much higher price.
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Related from TKer:
📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,517.12 and a closing high of 7,501.24 on Thursday. The index closed the week at 7,408.50, up 8.2% year-to-date. For market insights, check out the Stock Market tab at TKer. »
There were several notable data points and macroeconomic developments since our last review:
🎈Consumer price inflation rises. The Consumer Price Index (CPI) jumped 3.8% year-over-year in April, up from 3.3% the month prior, as energy prices surged. Adjusted for food and energy prices, core CPI was up 2.8%.
On a month-over-month basis, CPI jumped 0.6%, driven by a 3.8% increase in energy prices. Core CPI rose 0.4%. If you annualize the three-month and six-month figures — a reflection of the short-term trend in prices — core CPI climbed 3.2% and 2.9%, respectively.
While inflation rates have cooled over the years, they remain above the Fed’s 2% target rate.
For more discussion on inflation and monetary policy, read: The other side of the Fed’s inflation ‘mistake’ 🧐 and ‘When will the Fed cut rates?’ is not the right question for investors right now ✂️
⛽️ Gas and diesel prices remain elevated. From AAA: “After five straight days of declines earlier this week, the national average is once again on its way back up. Today’s national average is a couple cents lower than last week, but with crude oil prices hovering in the $100/barrel range, pump prices remain elevated. …Travelers are preparing to hit the road in record numbers next week, and drivers will be facing the highest Memorial Day gas prices in four years.“
Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.
For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊
🛍️ Retail shopping activity rose. Retail sales in April increased 0.5% to a record $757.1 billion, led by higher gasoline prices.
Excluding autos and gas, which tend to be volatile over the short-term, retail sales climbed 0.5%.
Here’s a breakdown of retail sales by category.
💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 7.1% y/y in the week ending May 9, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 5.8% y/y. Some of this was likely due to the impact of Mother’s Day (5/10/26 vs 5/11/25). Ex‑gas spending in the week ending May 7 was up a solid 4.2% y/y. This would largely exclude the impact of Mother’s Day.“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️
💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 211,000 during the week ending May 9, up from 199,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.782 million during the week ending May 2.
For more on the labor market, read: The next couple of years for the job market could be tough 🫤
🤔 Recent private job growth improved. According to payroll processor ADP, private U.S. employers added 33,000 jobs in the four weeks ending April 25.
For more on the labor market, read: About that ugly jobs report 📉
💰Household finances are stable and mostly normalizing. Household finances strengthened considerably during the COVID-19 pandemic, helped by a combination of limited spending options and government financial support. Over the past three years, finances have deteriorated but are mostly normalizing to pre-pandemic levels.
The New York Fed’s Household Debt & Credit report suggests finances are stabilizing at those normal levels. From the Q1 report: “Aggregate delinquency rates were flat in the first quarter of 2026. As of the end of March, 4.8% of outstanding debt was in some stage of delinquency, roughly the same as the share from 2025Q4.“
“Transition into early delinquency held steady for auto loans, but ticked down for credit cards, from 8.7% annually to 8.6%, and for mortgages from 3.9% to 3.8%.”
“Transition rates into serious delinquency were mostly unchanged for auto loans and credit cards, but increased slightly for mortgages from 1.4% annually to 1.5%.”
And while credit card debt balances often steal headlines, it’s a mistake to suggest consumers are maxing out their credit cards. The $1.25 trillion in credit card balances as of Q1 represents just a tiny fraction of credit card limits.
One popular way to look at debt relative to income is household debt service payments as a percent of disposable income. This is a metric that has been deteriorating for years. But relative to history, it remains pretty strong.
For more on household finances, read: Economic data can often be both ‘worse’ and ‘good’ 🌦️
🛠️ Industrial activity increased. Industrial production activity in April rose 0.7% from prior month levels. Manufacturing output rose 0.6%% compared to the prior month.
🏚 Home sales rose. Sales of previously owned homes increased 0.2% in April to an annualized rate of 4.02 million units. From NAR chief economist Lawrence Yun: “Despite mixed macroeconomic signals—including a record-high stock market and historically low consumer confidence—home sales were modestly boosted by the continued improvement in housing affordability. Mortgage rates are lower from a year ago, and average income growth is outpacing home price gains.”
Prices for previously owned homes rose from last month and year-ago levels. From the NAR: “The median existing-home sales price for all housing types in April was $417,700, up 0.9% from one year ago ($414,000) – the 34th consecutive month of year-over-year price increases.”
More from Yun: “Inventory still remains tight. Multiple offers, though not as intense as a few years ago, are still occurring. At the same time, days on market are lengthening on average, implying that consumers are taking their time before making decisions. The increase in second-home purchases reflects stronger finances among higher-income households, as well as the post-COVID rise in remote work and hybrid job schedules.”
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.36%, down from 6.37% last week. “While purchase demand is softening, it remains above this time last year. Recent data also shows existing-home sales modestly edging up.“
As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
👎 Small business optimism ticks higher, remains cool. The NFIB’s Small Business Optimism Index rose to 95.9 in April from 95.8 in March. It’s the lowest print since April 2025. From the NFIB: “Inflationary pressures continue to be a challenge for Main Street. While small business optimism is currently fragile, the benefits of the Working Families Tax Cut Act should start to feed into the private sector over the next few months.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃
🏢 Offices remain relatively empty. From Kastle Systems: “The Kastle Barometer national weekly average occupancy was 54.6% this week, a second consecutive weekly drop, falling from the prior week’s 55.0%. Seven of the ten cities in the Barometer saw their weekly average drop, but all just slightly lower from the prior week. Austin, Dallas, and San Francico were the three gainers. Dallas was the biggest mover in a positive direction, gaining 1.1% to 63.5% weekly occupancy. San Jose reported the largest drop, falling 1.3% to 44.8% average weekly occupancy. Looking at the graph of the last 12 weeks of Barometer data, the lines are very stable for the last six weeks, smoothing out the March waves.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 4.0% rate in Q2.
For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.
Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.
It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
