Research & Insight

The growing reliance on ever-higher profit margin assumptions is having an increasing influence on expected earnings - and therefore on price-to-forward-earnings multiples. Based on earnings through the end of 2025, operating margins are just under 16%. They are projected to rise to nearly 19.5% in 2026 and to almost 21% by 2027. Market risk that was previously visible as a steep price/forward-earnings ratio has been relocated into unprecedented assumptions for profit margins that are embedded in forecasted earnings.

Current record-high stock market valuations rest partly on the assumption that inflation volatility and recession risk will remain low. Historically, periods of stable inflation and infrequent recessions have supported elevated valuations, while rising inflation uncertainty and repeated downturns have led to meaningful valuation compression.

With the federal government open after its longest shutdown on record, we will soon get a clear indication of how payrolls fared in September and October. The most recent data, through August, already showed a marked slowdown in job growth, and much of the alternative data released during the shutdown suggests that this weakness has likely continued. There are already a handful of labor market characteristics that are typically only seen around recessions. None, taken individually, is reliable enough to be confident that the U.S. economy faces a recession. But they will be important to monitor as new payroll data is released.