Equity valuations have compressed by a decent amount over the last 12 months with no broad market crash or even a meaningful correction. It is unusual to see equity multiples move downward with so little market disruption, but it has helped relieve some pressure on the “bubble” debate. Indeed, the S&P 500’s forward price-to-earnings ratio peaked near 23x in October 2025 and now sits around 19x. The Magnificent Seven have seen a more pronounced de-rating, from around 33x to 23x—a 10-point compression—while the rest of the index (ex-Mag 7) has fallen from approximately 20x to 18x.
Normally, a price-earnings compression of this size comes with significant stock volatility; the last comparable episode of P/E decline, for example, was triggered by the Liberation Day shock, which induced a rapid and painful equity correction. Typically, when valuations are elevated, the market eventually pops; if it doesn’t, investors worry about future risks. However, this de-rating has been driven by earnings surging well beyond prices—earnings have been the driver bleeding some air out of the bubble.
The de-rating process has been remarkably measured: volatility has flared around discrete events rather than reflecting a broad loss of confidence. It has also been fundamental and bottom-up. The market has not been repriced wholesale; average pairwise correlation among S&P 500 stocks is around 10%, close to its lowest level since 2020, suggesting that individual names are being repriced rather than the index being degraded indiscriminately.
The more extreme devaluation of the Magnificent Seven is not surprising to us. We wrote a number of months ago about how the Mag 7 were at risk of becoming less magnificent as a group compared to other parts of the market. But even independent of their underperformance, investors have seen most equity markets (including non-U.S. equities) get notably cheaper, which indicates a universal paradox: the bull market continues with solid momentum, yet equities trade at more attractive valuations.
So why has the market de-rated so calmly? We see five key reasons.
1. Rates. Higher discount rates usually result in lower P/E multiples. The 10-year Treasury yield is the relevant observable benchmark: it has risen roughly 84 basis points since late October 2025, almost entirely through real yields rather than unanchored inflation expectations. As we discussed recently, real rates deserve close attention and further yield increases could threaten equities.
But for now, the rise in yields arguably reflects a reversion toward higher-trend nominal GDP growth rather than a warning sign. That’s a very different backdrop from 2022, when rising rates brought painful losses for growth stocks. Here, growth in expected earnings has provided a cushion, and equities have taken it in stride, even while narrowing price-earnings multiples.
2. Net capital supply. Equity buybacks, a massive tailwind in prior years for stocks, are showing signs of stalling, as new buyback announcements have peaked and rolled over. The hyperscalers in particular are increasingly funding the AI buildout through new equity and debt issuance rather than repurchasing stock. This not only increases incremental equity supply, but it also adds growing corporate debt supply for investors to assess. More capital competing for a finite pool of demand makes for a buyer’s market, and buyers will usually want better valuations: higher yields and lower P/Es. In essence, investors require a higher risk premium. This is the supply side of the same reset.
3. Capital intensity. A meaningful cohort of the market has shifted from low-capex, high-margin, intellectual-property and digital models toward hard assets, high capital expenditure and, in some cases, higher debt. Capital intensity (defined as capex to sales ratio) in the S&P 500, excluding financials, is now above its dotcom-era peak. The long-term relationship is powerful: more capital-intensive, lower-margin businesses generally command lower multiples. That helps explain why the Magnificent Seven have seen the sharpest de-rating. The shift also changes the quality and duration of the index’s cash flows.
4. Earnings sustainability and cyclicality. Strong earnings do not resolve the question of how long they will last. Some investors see this earnings phase as a sugar high—the “pig going through the python”—while others see growing evidence that it is more sustainable, with replacement cycles tied to AI. Demand for AI validation remains high, but the concern remains fair: investors will not put a high multiple on an earnings base they fear might be temporary.
Market composition matters, too. When cyclicals are the winners, they are historically considered value stocks, so as value and cyclical companies become a larger part of the index by market value, their typically lower P/E multiples exert more influence on the broader market. Historically, value has also tended to outperform growth after Fed hiking cycles.
5. Geopolitics. While the hardest to quantify, there is little doubt that geopolitical uncertainties have grown in recent years. Unresolved trade tensions and broader global uncertainty add a risk premium to markets. They can affect costs, demand and the reliability of earnings forecasts, while higher commodity prices can put pressure on inflation and bond yields. Geopolitical risk, therefore, reinforces the other four drivers in terms of increasing risk premium and downwardly impacting valuations.
Together, these drivers have allowed a relatively calm valuation de-rating while investors have continued to enjoy healthy year-to-date gains. We will be paying ongoing attention to these dynamics, but, for now, we continue to believe leaning into risk assets remains the right position. The orderly release of valuation pressure has reduced one major source of concern, allowing us to focus more closely on the earnings and cash flows needed to sustain further gains.
What to Watch For
Wednesday 09/16:
- U.S.: Retail Sales
- U.S.: Federal Reserve Interest Rate Decision
- U.S.: FOMC Economic Projections
- U.K.: Consumer Price Index
Thursday 09/17:
- U.S.: Initial Jobless Claims
- Japan: Bank of Japan Interest Rate Decision
- Eurozone: Consumer Price Index
- U.K.: Bank of England Interest Rate Decision
