US stocks face "overvaluation risks" and need two major factors to "rescue" them.

In recent weeks, the U.S. stock market has continued to hit new highs despite multiple pressures, but concerns have arisen over high valuations. The price-to-earnings ratio of the S&P 500 has reached 22 times, far exceeding the long-term average of 35%, with multiple indicators showing it is at historical highs. The market's ability to sustain its upward trajectory depends on whether corporate earnings can exceed expectations or if the Federal Reserve lowers interest rates. However, given the high valuation levels, the threshold for US stock earnings to exceed expectations is very high; at the same time, the Federal Reserve has indicated that it is not in a rush to adjust its policies. Currently, the U.S. stock market is facing rare adverse conditions in history. In 2025, numerous unfavorable factors have converged: the new U.S. government is working hard to adjust the global order, implement large-scale tariff policies, while conflicts in the Middle East have brought about a great deal of uncertainty. Nevertheless, U.S. stocks continue to move against the headwinds, hitting new highs repeatedly, with historical peak levels within reach. As the S&P 500 index rises, concerns grow over its high price-to-earnings ratio. Data shows that the index's current P/E ratio of 22 times future 12-month expected earnings is 35% higher than the long-term average level. Among the 20 valuation indicators tracked by U.S. bank strategists, the S&P 500 index is considered overvalued in each one. While valuation itself is not an effective market timing tool, due to the stock price trends of the companies in the S&P 500 index far outpacing their operational performance, a rough measure can intuitively reflect the extent of this serious disconnect in valuation. At present, investors are facing some key risks. The deadline set by U.S. President Trump to reach a tariff agreement with major trading partners is approaching on July 9, and the next earnings season is also about to commence. A model by Bloomberg considers factors such as U.S. Treasury bond yields, earnings per share, and stock risk premiums, and shows that, based on historical data, the S&P 500 index's fair P/E ratio should be around 17.7 times, while the current P/E ratio is 23.7 times. To bring the P/E ratio back to a reasonable level, earnings levels would need to grow by 30% over the next year (assuming stock prices remain constant). Kevin Gordon, senior investment strategist at Jiaxin Wealth Management, said, "The current market level is sustainable, but 'from now on' we cannot have too much confidence. Earnings expectations for the second half of this year may be too optimistic, combined with the P/E ratio nearing cyclical highs, putting greater pressure on earnings growth to exceed expectations. This is a goal that is not impossible to achieve, but the standards are high." According to Bloomberg strategists Gina Martin Adams and Michael Casper, aside from earnings growth, a significant rate cut by the Federal Reserve could also be another way to narrow the gap between the fundamentals and market prices in the S&P 500 index. They did not specify the extent to which the Federal Reserve rate cut would need to reach in order to achieve this goal. On Tuesday, Federal Reserve Chairman Powell reiterated his view that policymakers do not need to rush to adjust policies, but lower inflation levels and weak hiring trends may indicate that rate cuts will occur earlier this year. So far, despite fundamentals diverging from rising stock prices, Wall Street strategists still advise investors to view any potential pullback as a buying opportunity - especially in technology stocks and growth stocks.