As the S&P 500 hovers near record highs, analysts from Piper Sandler have identified four crucial factors underpinning current valuations, emphasizing that a reversal in any of these trends could pose significant risks to the market. Despite concerns regarding potential overvaluation, the analysts project that equity valuations are likely to remain steady through 2026, forecasting that “multiples stay higher for longer.”
Citing valuation as a reflection of “the risk perceived by investors,” Piper Sandler discourages using it as a timing tool for market entry. Supporting this view, Charles Schwab echoed that high valuations ought to signal potential vulnerabilities rather than serve as indicators for market timing.
The four key factors bolstering these elevated valuations are as follows:
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High Margins: Piper Sandler points out that the current high equity valuations are a result of strong operating margins, which measure the share of revenue remaining after covering operating expenses. Growth in these margins, particularly attributed to technology sectors, signals improved operational efficiencies. Apollo’s chief economist, Torsten Sløk, noted that the past two decades of margin expansions for the S&P 500 have predominantly originated from tech-related sectors. Furthermore, the ongoing enthusiasm for artificial intelligence is anticipated to enhance productivity and operational efficiency further, cementing high margins; T. Rowe Price CIO Sébastien Page described technology as “steroids for margins.”
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Tight Credit Spreads: Piper Sandler highlighted that credit spreads are currently at historically low levels, which lowers corporate borrowing costs and supports equity valuations. This term refers to the difference between interest rates charged to corporations compared to benchmark Treasury yields. Portfolio managers at Janus Henderson Investors have suggested that tight credit spreads may persist, citing a robust global economy, upcoming Federal Reserve interest rate cuts, corporate bond scarcity, and favorable corporate ratings as contributing factors. They also noted that the primary threat to maintaining these tight credit spreads would arise from “some shocking economic data” indicating a recession or a rise in inflation, potentially triggering a Federal Reserve rate hike.
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Low Oil Prices: Oil prices have experienced a decline in 2025, and while there has been a slight increase year-to-date, the forecasts indicate continued constraints due to fluctuating supply and demand. Piper Sandler compared oil prices with the S&P 500’s price-to-earnings ratio, suggesting that lower oil prices bolster the index’s valuations. The analysts emphasized that reduced energy costs have significantly contributed to rising equity multiples in recent years.
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Low Inflation: Lastly, waning inflation has been credited as a supportive element for U.S. equity markets. Piper Sandler compared core personal consumption expenditure data, a key inflation measure favored by the Federal Reserve, with market performance, suggesting that lower inflation levels can foster improved market valuations. Research from LPL Financial indicated that peak stock valuations tend to occur when inflation—represented by the Consumer Price Index (CPI)—is at its lowest.
In summary, while there are growing concerns over valuations in the current market environment, Piper Sandler emphasizes that these four factors are critical to maintaining elevated valuations. A shift in any of these elements could significantly reshape the landscape for investors moving forward.
