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Jobs, Housing, and Inflation: The Trio Steering Stocks
As we closed out Q3 2025 on September 30th, lets breakdown the current state of the stock market, as it presents a mixed picture of resilience amid lingering economic headwinds.
As of September 29th, the market is currently in “neutral” territory. The interesting thing is that not one week ago we sat in “greed” territory. Funny how investor sentiment can change on a dime.
Sentiment indicators suggest neither aggressive bullishness nor pessimism, but market trends say otherwise. We’ll dig into that a bit later.
The neutral stance reflects an area of caution, as investors continue to weigh the Fed’s actions against inflation pressures that seem never ending.
The chart below shows the volatility in investor sentiment over the last year, falling to extreme fear in April 2025 and once again rising to extreme greed in July 2025.
As for valuations, the S&P 500 is currently trading at a forward P/E ratio of about 23.77x, as per YCharts.
To put this in perspective, the historical 10 year average is around 20x. For more context, this exceeds levels seen during much of the post-2008 recovery but still falls short of the dot-com bubble’s extremes.
One way of better analyzing the P/E ratio of the S&P 500 is by using the S&P 500 Shiller PE ratio, also known as the CAPE ratio (Cyclically Adjusted Price-Earnings).
This is a valuation metric that divides the S&P 500 index price by the average of its earnings over the past 10 years, adjusted for inflation.
As of late September 2025, the ratio sits at around 40, which is significantly higher that its historical average of ~17 and coming close to historical high of 44 seen in December 1999.
The historical chart can be seen below.
A high CAPE ratio indicates that the market or a company is overvalued. It means that the stock price is high relative to the inflation-adjusted average earnings over the past 10 years.
In other words, a high CAPE ratio signals that the market could be overstretched, which could lead to potential lower future investment returns or even a market correction .
The Shiller ratio currently stands ~135% above its long term average.
Jerome Powell, Federal Reserve Chair, recently noted that stocks are “fairly highly valued” and echoed concerns that current prices have built in earnings growth for 2025, which is down from earlier projections in the year.
Sectors like Real Estate and Health Care remain relatively reasonable compared to their 10-year average, which could be considered a safer investment in this type of market.
Below is a chart of P/E ratios by sector and where they stand from August to September 2025.
Economic fundamentals help complete the story.
The August jobs report showed slowing growth, with nonfarm payrolls adding just 22,000 jobs and the unemployment rate steady at 4.3%.
As for housing, active listings surged 26% year over year in July and home prices are starting to stabilize after years of gains.
Mortgage rates are the lowest they’ve been since late 2024, which helps potentially boost sales.
Inflation continues to be a determining factor, with August’s inflation rate at 2.9%, above the Fed’s 2% target.
These indicators create mixed opinions on future stock prices.
Softer jobs and housing data could lead to rate cuts, which could help lift equities due to lower borrowing costs and stimulating demand.
On the flip side, inflation may delay easing, which could put downward pressure on valuations and growth stocks.
If the labour market continues to weaken further, corporate earnings could be impacted which would cap investor upside.
Are We Headed For A Recession?
The probability is there. The New York Fed’s model (seen below) shows a 28.8% chance within the next year.
A mild downturn could be very possible in Q4 2025/early 2026, but consumer spending and AI-driven hype could be two preventing factors.
TLDR
In summary, the markets neutral stance during a period of stretched valuations calls for selective investing.
There’s no guarrantee the market will keep up the run it’s been having, and I’ll be the first to say I don’t see it lasting for very much longer.
It’s important to focus on undervalued sectors and monitor what the Fed is doing next.
See you in the next one!
That's a good reminder
— #Dividend Growth Investor (#@DividendGrowth)
12:55 PM • Oct 2, 2025
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