Analysts at Piper Sandler have identified four critical factors supporting elevated stock market valuations as the S&P 500 hovers near record levels. According to the firm, a sustained reversal in any of these trends could pose significant risk to equity markets. While some investors worry about overvaluation, Piper Sandler maintains that multiples are likely to remain elevated through 2026.
The analysis comes as Wall Street debates whether current stock valuations are justified given economic conditions. Piper Sandler emphasized that valuation should be viewed as a reflection of risk perception rather than a market timing tool. Charles Schwab recently echoed this sentiment, noting that while valuation is a poor timing indicator, high valuations can signal market vulnerability to unexpected shocks.
High Operating Margins Support Stock Market Valuations
The first pillar underpinning current stock market valuations is historically high operating margins, according to Piper Sandler. Operating margin growth, which measures the portion of sales remaining after operating expenses, indicates improved corporate efficiency. Technology companies have been the primary driver of this trend.
Apollo chief economist Torsten Sløk highlighted that over the past two decades, all increases in the S&P 500’s operating margin have come from tech-related sectors. Additionally, artificial intelligence enthusiasm has not only boosted markets but is expected to enhance productivity and operating efficiency further. T. Rowe Price global multi-asset head Sébastien Page characterized technology as “steroids for margins,” helping explain US market outperformance relative to global equities.
Tight Credit Spreads Bolster Equity Multiples
Credit spreads remain at historically low levels, providing another key support for stock market valuations, Piper Sandler said. Tight credit spreads indicate low corporate borrowing costs, referring to the difference between rates lenders charge companies and benchmark Treasury yields. This environment makes it easier for corporations to finance operations and growth initiatives.
Portfolio managers Brent Olson and Tom Ross from Janus Henderson Investors suggested credit spreads could remain compressed, citing the mid-2000s and late-2010s as precedents. They pointed to a strong global economy, potential Federal Reserve interest rate cuts, corporate bond scarcity relative to government offerings, and updated corporate ratings as factors supporting tight spreads. However, they warned that shocking economic data signaling recession or an inflation spike could be the “biggest threat” to current credit conditions.
Low Energy Costs Contribute to Elevated Multiples
Oil prices declined throughout 2025 and remain constrained despite a year-to-date uptick, amid forecasts for increased supply and uncertain demand. Piper Sandler compared oil prices to S&P 500 price-to-earnings ratios, demonstrating that relatively low energy costs support the index’s valuation. Lower energy prices have played a key role in recent years in lifting equity multiples, the analysts noted.
Meanwhile, the firm highlighted that low energy costs contribute to real rates feeling lower than Treasury yields suggest. This perception influences investor appetite for equities over fixed-income alternatives. In contrast to periods of elevated energy prices, the current environment reduces cost pressures on businesses and consumers alike.
Declining Inflation Boosts Market Performance
Piper Sandler credits waning inflation as the fourth support to US equity markets, comparing core personal consumption expenditure data to market performance. The firm noted that in the post-pandemic world, investors have heightened sensitivity to inflation, meaning lower readings provide a boost to multiples. The Federal Reserve favors this inflation measure when making monetary policy decisions.
Research from LPL Financial shows that the highest stock valuations have been observed when the Consumer Price Index is lowest, and vice versa. This inverse relationship underscores how inflation expectations influence investor risk appetite and willingness to pay premium multiples for equities. However, any resurgence in inflationary pressures could quickly erode support for current valuation levels.
Market observers will continue monitoring these four factors throughout 2026 to assess whether elevated valuations remain sustainable. Any material shift in operating margins, credit conditions, energy prices, or inflation trends could trigger a reassessment of equity risk premiums, though the timing and magnitude of such changes remain uncertain.
