Why Are Valuations Falling in a Bull Market?

Some notable market moves we’ve experienced this year:

Mortgage rates have gone from 6% to 7%.

The 10 year Treasury yield has gone from 4% to 5%.

The inflation rate was 2.4% earlier in the year. Now it’s 3.4%.

Oil prices have shot up from less than $60/barrel in January to more than $100/barrel today.

That has caused the average nationwide gas prices to rise from $2.90 to well over $4 a gallon.

If you were to look at these numbers in a vacuum it would be a logical leap to say this has to be bad for both the stock market and the economy.

But the economy keeps chugging along. And the stock market is up double digits yet again this year.

The most interesting aspect of the returns in 2026 is the fact that it’s all fundamentally driven:

Earnings are growing even faster than stock prices which means valuations are actually falling.

So why is this the case?

Here are some questions to consider:

Do investors assume this year’s earnings growth won’t hold up because it’s mainly being driven by hyperscaler spending on the AI buildout?

Are investors worried about higher inflation?

Or is this all because bond yields are up so much this year thus depressing valuations?

It’s likely some combination of the three.

Whatever the reason, it’s fascinating to see such strength in earnings and stock market returns in what feels like a challenging macro environment.

For the time being, it feels like AI is the only thing that matters.

That will last until is stops.

I have no idea when that will happen.

Further Reading:
It’s a Concentrated World