The stock market continues to move higher since its April 9 low with the S&P now up more than 30% since then. The move is starting to defy logic as there are risks around tariff policy, the deficit and debt, and inflation – as well as stocks being historically expensive. “This is a massively, massively expensive market,” said Lisa Shalett, CIO at Morgan Stanley Wealth Management. “Stocks are not showing any fear about tariffs, they’re not showing any fear about policy related uncertainty related to stability or instability in Washington, they’re not showing fear any longer about inflation” (quoted in “Bargain Stocks Are Drawing Fans” , The Wall Street Journal B1, July 28).

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Let me take two examples of great companies that I have historically liked but whose valuation now concern me. Walmart (WMT) is the “low price leader” that arguably offers consumers the best value for their money. I’m a big fan. But the stock now trades at 38x their EPS guidance of $2.50-$2.60 for FY26 (ending January 31, 2026). Or take McDonald’s (MCD). MCD continues to be the leader in fast food but US Comps have been growing less quickly for a couple years now including a 3.6% decline in 1Q25. Nevertheless, MCD still trades for 25x my 2025 EPS estimate of $12. (MCD earned $11.72 in 2024 and $11.94 in 2023). (I sold WMT earlier this year and I sold MCD this morning).

A primary risk continues to be tariffs. The issue is not resolved and Trump seems determined to restructure the world economic order – without wrecking the stock market. Higher tariffs mean higher prices for imported goods, squeezing consumers and leaving them less money for discretionary purchases. It also raises costs for corporations forcing them to choose between higher prices or sacrificing margins and profitability. I’m not saying Trump is doing the wrong thing, especially with respect to China which steals intellectual property and gathers data and spies on foreign citizens via its corporations. (See Edward Fishman Chokepoints: American Power In The Age Of Economic Warfare if you have any doubts China is a bad economic actor). It’s a complex issues but higher tariffs do have economic repercussions.

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Another concern is the deficit and debt. At a certain point, investors are likely going to demand substantially higher interest rates to hold US Treasuries. If and when that happens, it will squeeze our highly indebted consumers, businesses and governments, forcing them to pay more in interest expense and therefore acting as a contractionary force on the economy. Stubbornly high inflation would also cause interest rates to rise. One way I’m hedging my stock holdings is through a 10% short position in The Long Term Treasury ETF (TLT). If the 30 Year Treasury does break above 5%, causing stocks to correct, at least I’ll be somewhat hedged.

One of the things I’ve learned from hard experience is that you have to give the market the benefit of the doubt. The American stock market, especially since World War II, has been a juggernaut. JP Morgan’s statement that “Any man who is a bear on The United States of America will go bankrupt” has stood the test of time. That’s why I think one of the most important blogs I’ve written is “Why You Should Have A Bullish Bias” (May 17, 2025). But that doesn’t mean you should put your head in the sand. The best bet is that the stock market will be just fine – but there are no guarantees.

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