3 Things You Need to Know This Week | Stock Valuations, Tariff Updates, Fed Minutes

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Jessica Simpson:

Hello, and welcome to 3 Things You Need to Know This Week, our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. To stay up-to-date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. And with that, here are three things you need to know this week.

First, the latest on stock valuations.

With price-to-earnings, or P/E, ratios sitting above their long-term averages, some investors fear stocks may be overvalued or too expensive. P/E ratios are derived by dividing the price of a stock or index by its earnings. The result represents how much investors are willing to pay for each dollar of earnings. The higher the ratio, the higher the theoretical price tag. While there are different types of valuation metrics, whether you're looking at a forward 12-month P/E ratio or the cyclically adjusted Shiller P/E ratio, history shows valuations don't reliably predict where stock prices go from here. High valuations can always go higher, and low ones can always go lower. We think P/E ratios have shortcomings when it comes to predicting future market moves. The forward P/E ratio, for instance, is partly derived from analysts' collective earnings estimates for the next 12 months, but analyst expectations tend to reflect prevailing sentiment. When sentiment is dour, analysts tend to lower earnings estimates, which can skew valuations higher. The Shiller P/E, also referred to as CAPE, is designed to predict returns over a ten-year period, something we believe is impossible to accurately do. Even if the Shiller P/E ratio worked as intended, it still wouldn't tell you what to expect from stocks over the next year or so. The bottom line? For every instance in which high P/E ratios are followed by poor stock returns, there are a similar number of times when strong stock returns follow. To us, investors are best served to look past the noise surrounding valuations as they are unreliable indicators of future performance.

Next, an update on trade and tariffs.

On Tuesday, the US Census Bureau and the US Bureau of Economic Analysis will release August 2025 trade balance data. Investors continue monitoring how tariffs are impacting the US economy and trade, and we believe that evidence still indicates tariffs are less disruptive than originally feared in April. In September, the US collected about $30 billion in tariffs, which is lower than consensus estimates. As of August, the effective US tariff rate was about 11.5%, which is also lower than many analysts expected. Despite tariffs at historically high levels and more new tariffs announced last Thursday, collections are lagging. So how does this affect investors? In truth, probably little. The effects of new tariffs on cabinetry, some furniture, heavy trucks and possibly branded or patented pharmaceuticals are unknown but will most certainly hinge on implementation. Further, booming Chinese exports suggest US tariffs are not impacting global trade as severely as previously feared. Despite curtailed access to the US, China is experiencing all-time high exports to India. Shipments to Africa are on a record-breaking track, and sales to Southeast Asia have exceeded their pandemic era peak. Post-tariff US imports from India, Africa and Southeast Asia are also near record highs. Businesses and countries are adapting to the new trade landscape, with global commerce still flowing, albeit via altered trade routes. Ultimately, while tariffs continue to generate uncertainty for some businesses and investors, we believe their impact on the market likely continues to be lower than many expect.

Finally, Fed meeting minutes. On Wednesday, the Fed releases minutes from its September meeting. Following the Fed's September 17th decision to cut its key interest rate by 25 basis points, some investors are eager to parse through the Fed's meeting minutes, hoping for clues about future rate decisions. Regardless of what the Fed's September meeting minutes reveal, it's impossible to know how the Fed will interpret various data or what it means for their next policy meeting, scheduled for October 28th and 29th. Attempting to predict what the Fed will do next is futile, in our view, especially given their penchant to say one thing and do another. The good news is monetary policy is only one of many market drivers and doesn't have a predetermined economic impact, whether positive or negative. As such, we believe long-term investors don't need to focus on predicting monetary policy in advance. Additionally, we don't see this bull market as reliant on whether or how much the Fed may cut rates further.

And that's it for this episode of 3 Things You Need to Know This Week. For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com. Thanks for tuning in and don't forget to hit like and subscribe!