Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, was up 0.3% for the week.
  • Structurally high profit margins may help explain lofty US stock market valuations.

The forward price-to-earnings (P/E) ratio for the US stock market, gauged by the price of the S&P 500 and its expected next twelve months’ earnings, currently sits at 21.5x, well above its five-year and ten-year averages of 20x and 18x, respectively.

In investment parlance, the market looks expensive. The high valuation situation depicted below, charting the P/E of the market over the last 10 years, has led to somewhat gloomy market outlooks for the near and medium-term.


Source: Sam Ro, FactSet, November 25, 2025

Comparing the current P/E to a historical average and concluding that the market is overvalued, which will thus result in poor returns, is akin to asserting that valuations are mean reverting over time.

However, the P/E has remained stubbornly high for the better part of the last five years. There is a possible reason that explains this dynamic: profit margins have risen. The companies at the top of the US stock market have been growing profits and expanding profit margins. Analysts expect that profit margins will rise in 2026.

Mike Wilson, chief US equity strategist at Morgan Stanley, has helpfully adjusted the market’s P/E ratio for profit margins over time so that valuations may be compared on more of an “apples-to-apples” historical basis. Normalizing the P/E ratio for profit margins, the market does not appear to be stretched. Mr. Wilson notes that it trades at a 35% discount to the dot-com bubble highs.


Source: Sam Ro, Morgan Stanley, November 2025

Some may argue that in the long-run, profit margins will revert to their historical mean. Although it is a contentious issue across investors and economists, it does not appear that profit margins revert to any long-term mean. In fact, margins have been steadily expanding since 1990. Which means that market valuations likely do not mean-revert, either.


Source: Goldman Sachs, September 2025

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