By one barometer, investors’ expectations for the stock market have never been this high at the start of a presidential term. The cyclically-adjusted price-to-earnings ratio, more commonly known as the CAPE ratio, stood at nearly 38 in late January, an “extremely high” level, according to Charlie Bilello, chief market strategist at Creative Planning.

“Historically, that has meant below average future returns for stocks when looking out 10 years,” he added.

Positioning tells a similar story. The US equity risk premium (ERP) — a measure of the differential between the expected returns of stocks and bonds — is deep into negative territory, something that hasn’t happened since the early 2000s. Whether that’s a negative indicator for share prices depends on the economic cycle. A lower number can be seen as indicating that corporate profits are going to rise. Or it could mean that stocks are climbing too rapidly and are far above their actual value.

Yet, the fourth-quarter earnings season so far is showing a troubling trend. Fewer US companies are topping their earnings estimates, tariff talks are dominating earnings calls, and outlooks for 2025 have already started to take a hit.

Shares of Ford Motor Co. and General Motors Co. tumbled after the carmakers reported, amid concerns about how these levies would hurt earnings this year. Industrial giant Caterpillar Inc., which is considered a proxy for trade tensions, warned that revenues will be lower amid demand pressures — and higher prices for the big-ticket equipment it sells will only make that situation worse.

Seeking Less Froth

Meanwhile, some investors are looking at niches within the stock market where valuations are less frothy and historical patterns more favorable. Scott Welch, chief investment officer at Certuity, is reallocating funds into a forgotten corner of the market that usually shines when the Federal Reserve cuts interest rates: mid-cap stocks.

“Megacap tech has been priced for perfection so it wouldn’t take much to cause a disruption,” Welch said in an interview. “They’ve bounced back because they have strong earnings and cash flows. But nothing lasts forever.”

Large-scale macro risks, like Trump’s tariffs, can often cause the stock market to move as a monolith. Indeed, share prices became highly correlated in late 2018, when trade tensions simmered with China and the path of the Fed’s interest-rate policy weighed on equities broadly. An index of three-month implied correlations from Cboe, the Chicago-based exchange, spiked at that time, and the S&P 500 posted its worst annual decline since the global financial crisis.

Right now, that correlation index is hovering near record lows, meaning stocks aren’t moving in unison. That’s typically a healthy sign for markets, indicating company-specific fundamentals are holding greater sway over macroeconomic developments. The downside, however, is that it encourages investors to take on more risk.

Ultimately, the biggest challenge for investors in this situation is reading the political winds and figuring out which way the Trump administration will go with tariffs and trade policy. The lack of clarity is pushing many Wall Street pros to keep it all on their radar — but not act yet.

“We always tell investors not to concentrate on politics because they rarely have an immediate impact on equities,” said Mark Newton, head of technical strategy at Fundstrat. “Every year has its share of scary things that investors need to worry about, but overall the equity market has been resilient.”

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