Markets entered 2025 trading on optimism. Though there was uncertainty due to the changes the new administration would bring, in the first few months, market clarity started to appear. Disinflation seemed on track and was decreasing, rate cuts were assumed inevitable, and AI-driven growth narratives gave investors reason to ignore fundamentals. But as summer winds down, the anticipated relief has yet to materialize. Interest rates remain high, valuations have stretched, and inflation is showing signs of life again.For financial professionals, this is the point in the cycle where vigilance matters more than momentum. It is not about forecasting catastrophes. After all, Keynes continues to remind us that markets can remain irrational longer than you can remain solvent. It is about recognizing that the market may be running ahead of the data.

Rate Cuts Not as Promised

Last summer, markets expected rate relief to come fast and deep. Some projections called for up to eight cuts by mid-2025. That never materialized. The Fed has delivered a few cuts, with rates coming down a full point. However, the original forecast is far from being fulfilled, leaving those looking to refinance, take on new debt, or even trying to understand the direction of the market befuddled.

Jerome Powell, with his term running through May 2026, has stayed cautious. While some Fed officials have hinted at easing, the broader tone is clear. The June dot plot showed seven members projecting no additional cuts this year. Monetary policy remains restrictive, and the expectations built into markets a year ago are unraveling.

The real risk is not whether the Fed acts. It is that investors positioned as if they already had. Financial conditions have loosened, but not because rates have. That disconnect puts portfolios at risk of repricing if inflation lingers or growth stalls. It is as if buying the rumor has driven markets here, while everyone is waiting to sell on the actual news.

Professionals should not build around what clients hope will happen. They should position themselves based on what policymakers have done, and what they continue to signal.

Inflation Not Leaving

Despite promises of inflation cooling entirely, it has come down somewhat, but it is not gone. Recent calculations show prices turning up again with the annual inflation rate finding a recent low in April of 2025 but slightly rising in the months since then. Volatility driven by energy, tariffs, housing, and other factors seems to be the cause, and all these items impact average citizens every day. This result is what drives the financial outcomes for clients. This inflation level is still well above the Fed’s target. More importantly, inflation expectations remain sticky. The Fed is signaling caution due to rising inflation, while businesses also forecast that elevated prices will persist for at least the remainder of the year.

Valuations Stretched

Markets are not cheap. The S&P 500’s forward price-to-earnings ratio is hovering near 30 times earnings, a level not seen since the pandemic, and before that, not since the great financial crisis. But this time, there is no pandemic stimulus driving asset prices. While much of the attention has focused on AI-fueled mega caps, valuation pressure has quietly spread across sectors. And while some may argue the top tech companies fuel it, markets have always had winners driving market averages and pulling them upward. Perhaps this is a concentration risk with the top holdings, but multiple compression risk now exists across a broader portion of the index.

Some of this is fueled by narrative. Investors are positioning for rate cuts, soft landings, and technology-led productivity gains, and hopefully, future clarity on tariffs and the settling of world conflict. But earnings have not kept pace with the optimism. Year-over-year earnings growth remains uneven, with profit margin guidance weakening in several sectors. Prices have surged faster than fundamentals can justify, creating the potential for sharp repricing if sentiment shifts.

Even if the AI trend proves durable, the trade is increasingly crowded. Index-level performance continues to mask internal fragility, especially in interest-sensitive areas. Professionals should not ask whether stocks are overvalued in theory. They should ask whether earnings can catch up with prices that have already pulled far ahead.

Final Thoughts

In an expensive time with high pressures, but the anticipated relief is not coming, discipline becomes strategy. Nothing is getting cheaper. Not capital, not equities, not inflation protection. Now is the time to trim overweight positions, revisit forward-looking cash flow assumptions, reduce duration exposure, and stress-test portfolios under slower growth with higher costs. Help clients understand that hope is not a hedge. Resilience comes from positioning early, not reacting late. 

Phil Stuczynski is an assistant teaching professor in finance at Penn State Behrend. 

Editor: Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM, Samuel P. Black III, Professor of Finance & Risk Management, Penn State Erie, mgf11@psu.edu.