The S&P 500 and Dow Jones Industrials climbed to new highs on Wednesday but closed the session lower in the wake of patchy U.S. employment data, while bond yields, oil, and metals prices also posted notable declines.
More on that below. In my column today I look at what equity valuations can tell us about relative stock market performance. If 2025 is any guide, expensive U.S. stocks at the start of this year suggest Wall Street could underperform once again.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today's Key Market Moves
Today's Talking Points
* U.S. employment mixed bag
U.S. job openings in December were much lower than expected, and the 'quits' rate remains low because workers are terrified of giving up their jobs and not finding another one. On the other hand, layoffs fell sharply, and the employment index of the services ISM unexpectedly jumped in November.
So, a mixed bag of U.S. labor market indicators for investors to chew on ahead of the all-important December payrolls and unemployment rate numbers on Friday. The labor market is soft, but not collapsing.
* Let it loose
Record-high stock prices, tight credit spreads, and anchored bond yields - apart from you, Japan - in the first few trading sessions of 2026 mean global financial conditions are the loosest in four years, according to Goldman Sachs indices.
There will be market dips, as evidenced by Wednesday's reversal on Wall Street. But it's a broadly bullish picture: $70 billion of U.S. corporate debt issued on Monday and Tuesday, Google and Amazon-backed Anthropic planning a multibillion-dollar fundraise, and investors putting money to work. Too bullish?
* Japan's bond decoupling
Japanese government bonds continue to crumble, with yields on 20-year maturities and beyond hitting new highs on Wednesday. The move was particularly notable, contrasting with the rally in euro zone and U.S. debt prices.
Even more notable, perhaps, is the yen's reaction -- or lack of reaction. Dollar/yen has been remarkably stable, stuck in a narrow 155.70-157.30 yen range in the last two weeks. Renewed JGB market weakness and broad-based dollar strength is having little impact, but for how much longer?
High valuations risk spoiling Wall Street's party
The new year has gotten off to a roaring start for U.S. equities, with the S&P 500 and Dow Jones breaking records, and investors are anticipating a fourth consecutive year of double-digit returns. But elevated valuations could yet spoil the party.
The optimism is palpable, and why not? The artificial intelligence capex boom is accelerating, the Federal Reserve is on track to lower interest rates further, and a fiscal stimulus bonanza is coming down the pike - all while economic activity and earnings growth continue to hum along nicely.
Little wonder then that analysts expect the S&P 500 to deliver near 10% returns in 2026, even after three consecutive years of double-digit gains have lifted the index by a cumulative 80%. The more bullish year-end forecasts of 8,000 and above imply at least 15% upside.
The most compelling counter-argument to this bullish consensus, however, is perhaps the most obvious: valuations.
The best indicator of where an index will be at the end of the year relative to expectations and its peers remains its starting point. There will always be exceptions, of course, but relatively cheap markets on January 1 tend to perform better by December 31. And vice versa.
This should give Wall Street bulls some pause.
The S&P 500 rose 16% in 2025. That is pretty impressive given the tariff tumult in the first half of the year and the index's 24% and 23% gains in the previous two calendar years.
But on a global level, it was a relatively poor showing.
Analysts at Deutsche Bank note that in a sample of 47 global indices, there was a "notable" relationship last year between annual returns in U.S. dollars and starting valuations. Markets that began the year with lower 12-month forward price-to-earnings ratios generally performed better.
U.S. stocks, which started the year with the highest 12-month forward P/E of 25, came in 37th place by Deutsche's calculations.
Indian and Danish stocks were the next most expensive markets on January 1 last year, and they both underperformed. Danish stocks were the weakest of all, with India's market coming in sixth from the bottom, despite the country boasting one of the world's fastest economic growth rates.
At the other end of the spectrum, Colombian stocks were the cheapest at the start of the year and ended up returning the most.
Of course, U.S. equity valuations are so high largely because Wall Street has outperformed its global peers for most of this century.
But could the tide now be turning?
According to strategists at Goldman Sachs, last year was the first in 15 that U.S. stocks lagged behind Asia, Europe, and emerging markets indices.
Goldman's view that U.S. stocks will continue to underperform over the next decade has stirred up some debate, although not as much as the claim by Apollo Global Management's Torsten Slok that the S&P 500's annualized returns over the next decade could be zero.
To be sure, Wall Street has proven the naysayers wrong for a long time, delivering strong returns despite high valuations. But as Deutsche Bank's team argues, this is the exception, not the rule.
"Even if U.S. equities were to defy valuation gravity once more amid today's AI-driven optimism, the weight of evidence across economies and centuries remains clear: valuations matter," Deutsche Bank analysts wrote in a study published in October.
Investors should keep this in mind. U.S. equity valuations are currently high by historical standards, both nominally and relative to their European, Asian and emerging-market peers, in large part thanks to the boom in AI-related stocks.
This suggests that Wall Street could find itself near the back of the global pack for a second consecutive year.
What could move markets tomorrow?
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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