Expensive Market — or Expensive Top?
After a volatile late winter — driven by the Iran conflict, AI spending concerns, and questions about whether earnings could support current valuations — the S&P 500 has rallied to fresh record highs, posting four consecutive weekly gains through April 24. First-quarter earnings season has reinforced the bullish tone: 84% of reporting companies have beaten estimates, and blended earnings growth is tracking at 15.1%, the sixth consecutive quarter of double-digit growth1. Beneath the renewed optimism, however, sits a more important question: is the market too expensive?
The first answer depends heavily on which lens you apply. The S&P 500’s forward 12-month P/E ratio sits at 20.9, above both the five-year average of 19.9 and the ten-year average of 18.9. The trailing P/E is 27.8, versus a ten-year average of 23.2. By most measures, valuations are stretched — not at dot-com extremes, but clearly on the expensive side of normal.
A different lens tells a sharper story. In a recent Barron’s piece, “The Stock Market Is More Expensive Than It Looks,” Jack Hough points out the forward price-to-free-cash-flow ratio sits roughly 37% above its 20-year average. Earnings and free cash flow normally move in close relationship, and the current gap is unusually wide. The reason is AI-related capital spending. Earnings accounting spreads the cost of data centers, chips, and networking gear across their useful life. Free cash flow subtracts those outlays immediately. Meanwhile, the revenue flowing to the companies on the receiving end of that spending — Nvidia, Broadcom, Micron — is booked right away. The result is that earnings look comparatively healthy while cash generation looks pinched.
A closer look at the accounting
Does this divergence mean reported earnings are overstating true profitability? Not necessarily. Spreading the cost of capital investments across the years they generate income is the standard — and appropriate — treatment for any long-lived asset.
Whether today’s AI capex will ultimately earn its cost of capital is a legitimate and open question, however. Free cash flow is a useful cross-check during a heavy-spending cycle, but it systematically understates economic value during any major infrastructure buildout. The same critique could have been leveled at railroads in the 1870s, electrical infrastructure in the 1920s, or fiber networks in the late 1990s. Some of those buildouts paid off handsomely and some did not — and the distinction was not visible in the free cash flow statements at the time.
To continue reading, please download the full Moran Monthly Digest here.
Moran Monthly Digest: Apr. 2026
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Expensive Market — or Expensive Top?
After a volatile late winter — driven by the Iran conflict, AI spending concerns, and questions about whether earnings could support current valuations — the S&P 500 has rallied to fresh record highs, posting four consecutive weekly gains through April 24. First-quarter earnings season has reinforced the bullish tone: 84% of reporting companies have beaten estimates, and blended earnings growth is tracking at 15.1%, the sixth consecutive quarter of double-digit growth1. Beneath the renewed optimism, however, sits a more important question: is the market too expensive?
The first answer depends heavily on which lens you apply. The S&P 500’s forward 12-month P/E ratio sits at 20.9, above both the five-year average of 19.9 and the ten-year average of 18.9. The trailing P/E is 27.8, versus a ten-year average of 23.2. By most measures, valuations are stretched — not at dot-com extremes, but clearly on the expensive side of normal.
A different lens tells a sharper story. In a recent Barron’s piece, “The Stock Market Is More Expensive Than It Looks,” Jack Hough points out the forward price-to-free-cash-flow ratio sits roughly 37% above its 20-year average. Earnings and free cash flow normally move in close relationship, and the current gap is unusually wide. The reason is AI-related capital spending. Earnings accounting spreads the cost of data centers, chips, and networking gear across their useful life. Free cash flow subtracts those outlays immediately. Meanwhile, the revenue flowing to the companies on the receiving end of that spending — Nvidia, Broadcom, Micron — is booked right away. The result is that earnings look comparatively healthy while cash generation looks pinched.
A closer look at the accounting
Does this divergence mean reported earnings are overstating true profitability? Not necessarily. Spreading the cost of capital investments across the years they generate income is the standard — and appropriate — treatment for any long-lived asset.
Whether today’s AI capex will ultimately earn its cost of capital is a legitimate and open question, however. Free cash flow is a useful cross-check during a heavy-spending cycle, but it systematically understates economic value during any major infrastructure buildout. The same critique could have been leveled at railroads in the 1870s, electrical infrastructure in the 1920s, or fiber networks in the late 1990s. Some of those buildouts paid off handsomely and some did not — and the distinction was not visible in the free cash flow statements at the time.
To continue reading, please download the full Moran Monthly Digest here.
FactSet Earnings Insight, April 24, 2026.
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Insights That Drive Better Decisions
Stay ahead with expert perspectives on markets, risk, and opportunity, grounded in a disciplined approach to long-term wealth management.