Most Americans saving for the future have been well-pleased with the double-digit returns of their equity retirement plans over the past few years. Some are pausing to ask whether the stock market is too expensive, and if so, whether a reversal to the stellar growth is in order. It is a reasonable question, but perhaps not the most important. The more consequential question is whether the dollars in which your account is denominated will buy what you need when you finally need to spend them. Inflation and/or dollar devaluation threaten the purchasing power of what you’ve worked hard to save and invest.
Let’s look at the first question. Is the market overvalued? The S&P 500 trades at twenty times forward earnings against a thirty-year average near seventeen, and the Shiller ratio, which measures price against a decade of inflation-adjusted profits, has reached forty-one times. Since 1881, the American stock market has been more expensive only once, in the closing months of the dot-com bubble (1999).
Wall Street offers two similar rebuttals as to why “this time is different.” The first is that growth is accelerating, and the forward multiple has actually fallen this year, from roughly twenty-three times. So, stock values are catching up to earnings rather than running away from them. The second, which investor Michael Lebowitz recently set out, is the PEG (price-earnings to growth) ratio, which divides the forward earnings multiple by expected long-term (three-to-five-year) earnings growth. The PEG ratio currently sits at its lowest reading in at least thirty years. Stock prices haven’t come down, but the forward multiple fell because analysts raised the growth forecast faster than investors raised the price. Since the end of June, the S&P500 index has risen 2.8 percent while the forward earnings estimate rose 4.7 percent. PEG is at a record low only because long-term growth forecasts are the highest since 1995. Every bullish signal in this market is a statement about estimates, which is indicia of sentiment, not fact.
Analysts’ estimate accuracy has a very poor track record. Lebowitz’s data show annual earnings forecasts being revised downward in nine of the ten years from 2016 through 2025. Three decades of growth projections bear almost no statistical relationship to actual growth that followed. That pattern has recently reversed; 2026 and 2027 estimates have been moving up rather than down.
We know the reason for this recent reversal. In the last quarter, Alphabet reported other income of $98 billion, almost entirely unrealized markups on its stakes in SpaceX and Anthropic, which lifted net income by $77.1 billion and diluted earnings per share by $6.26. Ignore those one-time gains and Alphabet earned $2.85 operating EPS per share, below the analyst consensus of $2.89. Not only did the firm whose earnings produced the index’s record quarter miss on its actual operational result, Alphabet also reported negative free cash flow for the first time in its history. Amazon booked a further $53.4 billion in one-time gains, largely on its investment in Anthropic. Two names out of five hundred in the S&P supply more than 18 percentage points of the earnings growth of the US stock market. Exclude these two outliers, and projected earnings growth for the S&P 500 would be forty percent lower.
The nominal dollar value of your account it one thing. What is measures in purchasing power is another. That purchasing power is being undermined by inflation driven by government spending.
The federal government will run a deficit of roughly $1.9 trillion this fiscal year, and net interest on the national debt has reached about $1 trillion annually, up from $971 billion last year. Interest is now the second-largest line in the federal budget, having surpassed both national defense and Medicare, trailing only Social Security, without a congressional vote. Gross federal debt stands near $39 trillion, roughly 123 percent of gross domestic product, and the Congressional Budget Office projects interest costs will more than double, to $2.1 trillion, within a decade. A large share of that debt matures within a year and must be refinanced at rates well above the coupons being retired, so the cost rises mechanically even if Washington passes nothing new. The cost of wars in Ukraine and the Middle East accelerates this trend.
The bond market is responding accordingly. The ten-year Treasury has topped 4.75 percent, its highest level since January 2025. The thirty-year Treasury sits above 5.2 percent. Higher yields widen the deficit, the wider deficit demands more issuance, and large issuance pushes yields higher still.
Here is where it becomes uncomfortable for savers, and where conventional investment wisdom falls short. Federal Reserve Chairman Kevin Warsh warned on Friday that inflation has not meaningfully slowed, and markets now price better than even odds of a rate hike in September. If the Fed hikes, it worsens the arithmetic above, because every basis point is eventually applied to $39 trillion of debt the Treasury must refinance. If the Fed does not hike, inflation runs above target for years. There is no third path. A government this indebted eventually loses the ability to conduct monetary policy independently of its own financing needs, a condition economists call fiscal dominance. In practice it means interest rates are held below the rate of inflation for a decade or more, depleting the real value of savings and purchasing power. Every heavily indebted government in history has taken this path without announcing it. Inflation is a hidden tax on bondholders and savers generally.
For a saver, the consequence runs against intuition. Persistent deficit spending is, in accounting terms, private sector income, and it arrives as corporate revenue. This is precisely why stock indices in fiscally incontinent countries climb to record after record while the people who own them grow steadily poorer. The danger to your retirement account is not primarily that the number on the statement falls. It is that the number rises while the value of the dollar it is expressed in—your purchasing power—shrinks beneath it.
What, then, should an individual do inside an IRA or a 401(k)?
Stay invested, but stop owning the index as though it were an index. The ten largest companies account for nearly forty percent of the S&P 500, and Nvidia alone is eight percent of it. Most savers hold that concentration by accident, having been told for thirty years that an index fund is diversification. Equal-weighted and value funds own the same five hundred companies without the wager on eight balance sheets and a single capital expenditure cycle. Health care near nineteen times earnings and financials near 15.5 appear less overvalued. Consumer staples at 22 times for mid-single-digit growth may be a value trap wearing defensive clothing.
Rethink bonds entirely. The old assurance that Treasuries rally when stocks fall depends on the government being a credible safe haven. In 2022 the two fell together, as they routinely do in countries with fiscal problems. Own short maturities and inflation-protected securities. A thirty-year bond yielding below inflation is a slow expropriation of your wealth dressed as safety. Gold belongs in the portfolio as ballast rather than speculation. Most workplace menus will not offer it, which is one of several arguments for keeping an IRA alongside the 401(k). Finally, change the yardstick: judge your results against the consumer price index, an ounce of gold, or a barrel of oil, because dollar returns will flatter you at precisely the moment they should not.