11:44 pm - February 4, 2026
Piper Sandler analysts have identified four critical factors supporting current S&P 500 valuations as the index trades near record highs, warning that a sustained reversal in any of these trends could pose significant risks to the market. The firm emphasized that while concerns about overvaluation persist on Wall Street, they expect equity multiples to remain elevated through 2026. According to the analysts, valuations should be viewed as an indicator of investor risk perception rather than a market timing tool.
The investment bank outlined high operating margins, tight credit spreads, low oil prices, and declining inflation as the key pillars propping up equity valuations. Additionally, Piper Sandler noted that any breakdown in these supportive conditions could potentially trigger a valuation collapse, though they maintain their base case for stable multiples in the near term.
High Operating Margins Drive S&P 500 Valuations
Current equity valuations reflect historically high operating margins, which measure the share of sales remaining after operating expenses, according to Piper Sandler. These elevated margins signal improved corporate efficiency across the market. However, the expansion has been highly concentrated in specific sectors.
Apollo chief economist Torsten Sløk noted that all of the S&P 500’s operating margin increase over the past two decades has come from tech-related sectors. Meanwhile, artificial intelligence enthusiasm continues to support expectations for further productivity gains and operating efficiency improvements. T. Rowe Price global multi-asset head Sébastien Page characterized technology as “steroids for margins,” pointing to the US stock market’s historic outperformance relative to global peers.
Credit Spreads Support Market Valuations
Credit spreads have reached historically low levels, providing additional support to S&P 500 valuations, Piper Sandler reported. Tight credit spreads indicate that corporate borrowing costs remain low relative to benchmark Treasury yields. This environment reduces financing pressure on companies and supports higher equity multiples.
Janus Henderson Investors portfolio managers Brent Olson and Tom Ross suggested that credit spreads could remain compressed, citing precedents from the mid-2000s and late-2010s. They identified a strong global economy, potential Federal Reserve interest rate cuts, corporate bond scarcity, and updated corporate ratings as factors supporting continued tightness. Nevertheless, the biggest threat to credit spreads would be shocking economic data signaling recession or an inflation spike potentially prompting Fed rate hikes, according to the managers.
Energy Prices and Inflation Trends
Oil prices declined throughout 2025 and remain constrained despite a year-to-date uptick, with forecasts pointing to 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 index valuations. The analysts emphasized that lower energy prices have played a key role in lifting equity multiples in recent years while also contributing to real rates feeling lower than Treasury yields suggest.
In contrast, declining inflation serves as another critical valuation support, with Piper Sandler crediting “waning” inflation as beneficial to US equity markets. The firm compared core personal consumption expenditure data, the Federal Reserve’s preferred inflation measure, to market performance. LPL Financial research indicates that the highest stock valuations have historically occurred when inflation is lowest, reinforcing this relationship.
Charles Schwab recently underscored that while valuation is ineffective for market timing, investors should view high valuations as an indicator of market vulnerability to unexpected shocks. Investors will continue monitoring these four factors throughout 2026 to assess whether the conditions supporting elevated S&P 500 valuations remain intact, though the timeline for any potential shifts remains uncertain.
