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, slipped 0.4% for the week.
  • Broad earnings growth and stable valuations pushed the market higher in 2025.

Measures of stock market valuations, the most prominent being the P/E ratio, are notoriously bad predictors of short-term returns. In a recent research note, Goldman Sachs concluded that the P/E ratio only explains 5% of the variation in market returns over the next twelve months.

Valuations also do not exhibit mean reversion, which makes interpreting a single metric such as the P/E ratio difficult. The S&P 500’s forward P/E ratio stands at 22x next year’s earnings. What does that figure mean?  It is well above its long-term average. That does not mean the market is expensive or at risk of below average returns.

Instead, the market may be correctly expecting strong earnings growth – the denominator in the P/E ratio.

The chart below shows the forward P/E of the S&P 500 over the course of the year. While the market was briefly “cheap” back in April, its valuation rebounded and leveled out mid-year. Despite the commonly held view that a bubble in tech stocks pushed the market up for the year, stocks did not become more expensive. Broad earnings growth drove the market’s 17.9% return in 2025.


Source: Conor Sen, Bloomberg, January 13, 2026

Under the hood, there have been some noteworthy stock-specific valuation changes recently. Existential AI dread is bubbling through software names. The AI firm Anthropic recently released two models, Claude Code and Cowork, which appear able to allow companies to make their own much cheaper versions of software applications. Some investors are wondering what the future may hold for SaaS companies such as Salesforce and Adobe.

On the other side of that coin, the benefits from cost reduction would accrue to the thousands of firms currently subscribed to those applications. Also, Anthropic has taken early steps to launch an initial public stock offering this year. So, diversified investors will have exposure to these developments should they unfold. That said, it remains very difficult to know which software companies will survive, or if there is even a transition occurring. 

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