MARKET UPDATE [NOVEMBER 2025]

MARKET OVERVIEW

Market sentiment over the month was shaped by a persistent tension between slowing growth and residual inflation, compounded by political uncertainty and rapid structural change in key industries. Investors moved back and forth between risk-on and risk-off positioning as incoming data, often delayed or partial, undermined confidence in traditional macro signals. The prolonged U.S. government shutdown became a material factor in its own right, disrupting transportation, delaying payments, and withholding critical economic releases. This lack of visibility initially supported the U.S. dollar and restrained expectations for near-term rate cuts, but as the month progressed markets increasingly concluded that the hidden data would likely reveal a weakening labor market rather than a resurgence in inflation, shifting expectations decisively back toward easing by year-end.

Economic momentum softened but did not collapse. U.S. manufacturing activity remained in contraction, while services stayed in expansion despite cooling employment indicators. Labor market dynamics were increasingly asymmetric. Headline jobless claims remained historically contained, yet corporate layoffs accelerated across retail, technology, and telecommunications, signaling a clear end to post-pandemic labor hoarding. Investors largely welcomed these announcements as margin-protective, reinforcing the sense that equities were entering a late-cycle phase where cost discipline matters more than revenue growth. Consumer sentiment weakened steadily, reflecting lingering price pressures, political uncertainty, and job-security concerns, adding to evidence that demand is becoming more fragile even as inflation eases.

Globally, growth divergence remained a defining feature. Canada surprised with strong headline GDP growth, though this was driven by falling imports rather than robust domestic demand, leaving policymakers cautious. Europe saw modest upgrades to growth expectations on the back of consumption and investment, even as retail sales disappointed and labor demand softened. Japan moved more aggressively on the fiscal front, approving a large stimulus package aimed at offsetting rising living costs and supporting growth, but higher bond yields signaled mounting concern over fiscal sustainability as inflation remains above target. China continued to weigh heavily on the global outlook, with decelerating retail sales, contracting property investment, weaker exports, and shrinking shipments to the U.S. reinforcing the view that its slowdown is structural rather than cyclical. Parts of Southeast Asia benefited from supply-chain reallocation and tariff advantages, but not enough to offset the broader drag on global manufacturing.

Financial markets mirrored these crosscurrents. Equity performance was uneven and highly sensitive to positioning around rates and valuations. Measures of long-term valuation, particularly in U.S. equities, reached historically extreme levels, reviving uncomfortable comparisons with previous market peaks. This left markets vulnerable to sharp pullbacks, especially when concerns resurfaced about overinvestment in artificial intelligence. At the same time, earnings from AI infrastructure leaders repeatedly demonstrated the strength of underlying demand. Record results from major semiconductor and cloud providers, alongside enormous long-term computing commitments from leading AI developers, underscored that capital spending on AI remained powerful and global in scope. However, growing scrutiny of profitability, depreciation practices, and escalating losses at AI application developers highlighted a widening divide between those capturing immediate economic value and those still dependent on future scale to justify current costs.

Interest-rate markets oscillated as investors weighed softer growth against incomplete inflation and employment data. Inflation generally cooled across North America and Europe, helped by falling energy and food prices, while core measures drifted closer to central bank targets rather than decisively below them. Tariffs proved less inflationary than feared, absorbed largely by corporate margins, but signs of stress emerged beneath the surface. Unusual pressures in short-term funding markets pointed to tighter liquidity conditions, a reminder that financial strains can surface even as policy rates fall. By month-end, weakening consumer confidence and rising unemployment indicators pulled bond yields lower and solidified expectations for near-term monetary easing.

Commodities and currencies reflected a defensive tilt. Gold rallied strongly as rate-cut expectations firmed and confidence in fiscal discipline weakened. Oil prices eased in the near term but remained supported by geopolitical risk, sanctions, and fragile supply dynamics. Digital assets underperformed during episodes of equity stress, challenging their role as portfolio diversifiers in risk-off environments. The U.S. dollar, which had benefited earlier from data uncertainty, became increasingly vulnerable as investors anticipated the release of backlogged economic indicators and a more accommodative policy trajectory.

Geopolitical developments added to the background risk premium. China’s expanding naval capabilities, renewed focus on nuclear competition among major powers, and increased defense spending initiatives in Europe reinforced expectations of structurally higher military expenditure and longer-term fiscal strain. Trade policy continued to influence corporate behavior and supply chains, with selective tariff relief and legal uncertainty in the U.S. contributing to an uneven global trade environment.

Overall, the month reinforced a shift toward selectivity rather than broad optimism. Markets placed greater emphasis on balance-sheet strength, sustainable margins, and earnings quality, while relying less on liquidity-driven multiple expansion. With growth slowing but not stalling, inflation easing but not defeated, and policy support drawing closer but still conditional, investors ended the period cautiously positioned, aware that the next market phase will be determined less by narrative and more by the hard data set to re-emerge.

A. Key Changes to Fundamental Drivers of Market Growth and Risk

S&P500 Market Cap (October → November): 58.210 trillion → 57.589 trillion

Analyst Consensus Earnings Forecasts (2025): 267.4 → 268.0

Analyst Consensus Earnings Forecasts (2026): 305.0 → 310.0

Model Earnings CAGR:  9.20% → 9.89%

S&P500 Aggregate Earnings (TTM) latest quarter (in $ Billions): 487.33 →  unchanged.

06/30/2025 Preliminary Earnings (in $ Billions): 545.91 → unchanged.

S&P500 Aggregate Dividends (TTM) latest quarter (in $ Billions): 164.1 → unchanged.

06/30/2025 Preliminary Dividends (in $ Billions): 165.16 → unchanged.

S&P500 Aggregate Buybacks (TTM) latest quarter (in $ Billions): 293.45 → unchanged.

06/30/2025 Preliminary Buybacks (in $ Billions): 234.57→ unchanged.

Model Payout Ratio %: 82.15% → 80.51% → unchanged.

B.    Implied Equity Risk Premium

The implied equity risk premium (IERP) represents the excess return investors demand for holding equities instead of risk-free government bond. As it is not directly observable, the IERP is estimated by discounting expected future cashflows, primarily aggregating dividends and share repurchases. At Baoro Research, we calculate the IERP each month at the market index level, utilizing it as an indicator of valuation conditions, investor sentiment, and consequently, potential market direction. As of November 30, 2025, our estimate for the IERP stands at 3.97%, which remains notably below both the historical average of approximately 5.36% and the recessionary threshold of 6.16%.

C. Market Valuations

With an average equity risk premium of 5.36%, the revised implied fair value for the S&P 500 is 5053.91, up from 4,906.17. The increase is mainly due to a lower 10-year treasury yield, which raises the value of future cash flows.

Despite the non-revised aggregate repurchase amount by S&P500 firms in aggregate, risks of such large buybacks during an extended market valuation has to be restated as per our analysis that we made in the previous month-end report.

1.      Misallocation of capital

Buybacks are most value accretive when stocks are undervalued If companies repurchase heavily at inflated valuations, they destroy long term shareholder value by paying too much for their own equity instead of investing in productive growth. This is similar to buying back “high” and then later needing to reissue equity at “low”, which may result in a net loss for various firms.

2.      Vulnerability in downturns

When markets correct, those expensive buybacks leave companies with less cash and as a result more inherent financial leverage, which is especially pronounced if firms have engaged in additional borrowing to fund repurchases. This can inherently increase financial fragility, especially in firms with greater cyclical nature to their business model.

Taking these considerations into account, the following table presents S&P 500 index valuations across a range of key implied equity risk premium (IERP) levels.

S&P500 Value (IERP 6.16%)

An IERP of 6.16% is commonly observed during periods of economic downturns, which for value investors can indicate a suitable moment to reintroduce equity risk into portfolios. Should the current market narrative lead to challenging economic conditions, S&P500 valuations suggest prices could decrease to 4387.52, a 36% decline from current levels. Despite the extent of this potential overvaluation, this remains the base case model, with the intention to reintroduce equity exposure if such a scenario unfolds.

S&P500 Value (IERP 6.93%)

An IERP of 6.93% is typically observed during periods of substantial market decline, such as at the height of the global financial crisis. Should a similar scenario arise, the index could experience further depreciation, with the S&P 500 potentially reaching 3,891.67, which would be a decline of approximately 43.18%. While this extent of price decrease may appear improbable, it remains within the realm of possibility based on historical precedents. For instance, equity markets dropped 89% from peak to trough during the Great Depression (1929 to 1932), while during the dotcom bust and subsequent financial crisis, the Nasdaq Composite fell roughly 78% from its March 2000 high to its October 2002 low. Similarly, the S&P 500 and Dow Jones Industrial Average both declined by approximately 50 to 57% during the 2007 to 2009 financial crisis.

Multiples Lens

Due to variability in the inputs and outputs associated with the IERP model, a multiples-based valuation is also conducted. In this approach, cash flows are represented by the sum of aggregate S&P500 firms’ dividends and buybacks on a trailing twelve-month basis.

Data from our model indicates that the S&P 500 historically has an average price to cash flow ratio of 23.4. The multiples at plus or minus one standard deviation are 28.4 and 18.4, while the values at plus or minus two standard deviations are 33.4 and 13.3. Using the most recent trailing twelve months aggregation of firm dividends and buybacks, the following valuations are derived across these key multiples.

Valuation Summary

D. Recession Probability

The New York Federal Reserve publishes recession probability estimates based on treasury spreads, particularly the difference between the 10-year bond rate and the 3-month treasury bond yields. According to these measures, the projected recession probability for November 2026 is 26.51%, which is lower than the approximately 70% estimate reported in early 2023 during a period of heightened market inflation concerns.

E.  Canary 

Consumer Discretionary: Overvalued by 19.97%

Consumer Staples: Overvalued by 3.22%

Energy: Overvalued by 26.47%

Financials: Overvalued by 32.48% 

Healthcare: Overvalued by 12.60%

Industrials: Overvalued by 30.89% 

Basic Materials: Overvalued by 12.85% 

Technology: Overvalued by 26.42%

Utilities: Overvalued by 14.47%

F. More on Valuation Concerns

Current market valuation metrics point to an extremely stretched equity environment. The Shiller P/E ratio stands at 40.1, which corresponds to an earnings yield of roughly 2.5 percent. By comparison, the 10 year US Treasury yield is approximately 4 percent, while the 1 year Treasury note yields about 3.61 percent. This means that the equity market is offering a lower return than both short term and long term risk free government securities. Even before considering liquidity premiums or term premiums, the market’s implied return is inferior to cash and bonds, raising concerns about the relative attractiveness of equities.

Reconstructing valuations from a bottom up perspective helps isolate the key variables driving this discrepancy. Trailing twelve month aggregate operating earnings for the S and P 500 total approximately 2.051 trillion dollars. After adjusting for index units, this translates to roughly 244 earnings units at the index level. With the S&P 500 trading near 6,850, the implied operating earnings multiple is approximately 28 times, corresponding to an operating earnings yield of about 3.57 percent. While this yield is closer to prevailing interest rates, it remains extremely stretched from a risk standpoint, particularly when comparing risky equity returns to those available on risk free assets.

Historically, equity investors have demanded meaningful compensation for bearing risk. Analysis of implied equity risk premium data suggests that, on average, earnings yields exceed the 10 year Treasury yield by around 5 percent. In the current rate environment, this would imply a fair earnings yield of roughly 9 percent, combining a 4 percent risk free rate with the historical risk premium. Applying this required return to today’s aggregate earnings level of 244 units results in an implied index value of approximately 2,710. While mathematically consistent, such a level is clearly unrealistic, as the probability of such an extreme downside move is exceedingly small.

A more practical approach is to examine long term historical relationships between Treasury yields and equity earnings yields. Despite significant volatility over time, with Treasury yields ranging from peaks near 15.5 percent during the inflationary period of the late 1970s to near zero during the COVID 19 pandemic, the long term average Treasury yield has been around 3.5 percent. Meanwhile, a historical average price to earnings ratio of 16 implies an earnings yield of 6.25 percent. This produces an average equity risk premium of approximately 2.75 percent, a more modest but realistic level.

Adding this historical premium to the current 10 year Treasury yield of 4 percent implies a required equity return of approximately 6.75 percent. Given current aggregate earnings capacity, this required return translates into an implied S&P 500 index level of roughly 3,615. Although this figure remains well below current market levels, it aligns closely with discounted cash flow model results that incorporate aggregate dividends and share buybacks. Using an implied equity risk premium of approximately 6.9 percent, these models also converge on a price to earnings ratio near 16, a notable result given that the earnings yield framework requires neither growth assumptions nor payout assumptions, while the discounted cash flow approach does.

Reaching such an index level would require valuation compression resulting in a market drawdown of roughly 43 percent. While such a decline may appear improbable, historical precedent demonstrates that it is well within the realm of possibility. Equity markets declined by approximately 89 percent during the Great Depression, the Nasdaq Composite fell about 78 percent during the aftermath of the dot com bubble, and both the S and P 500 and the Dow Jones Industrial Average declined between 50 and 57 percent during the 2007 to 2009 financial crisis.

Another way to frame current valuations is through the lens of implied growth expectations, which addresses a key limitation of relying solely on absolute price to earnings ratios. Earnings are not static and evolve over time, while prices fluctuate continuously. As a result, forward earnings multiples provide a more informative measure of valuation. A high multiple may be justified if future growth is sufficiently strong, although this justification remains contingent on growth actually being realized.

Using the current index level earnings of 244 units and assuming a historically consistent equity risk premium of 5 percent, the market’s current price implies cumulative forward earnings growth of approximately 153 percent. Given analyst consensus forecasts of annual earnings growth between 10 and 15 percent over the next two years, it is possible to estimate how long such growth would need to be sustained. At a 10 percent growth rate, earnings would need to compound for approximately 10 years to achieve this level. At a 15 percent growth rate, the same cumulative growth would require about 6 years.

These assumptions closely align with research by Professor Steven A Sharpe published in 2004, which found that markets tend to apply long term analyst growth forecasts over horizons ranging from 6 to 10 years. This suggests that current market pricing assumes near perfect execution of long term growth expectations. Even small negative surprises could therefore have an outsized impact on valuations.

Taken together, the evidence suggests that the market is not only historically expensive based on traditional valuation metrics but also priced for highly optimistic growth outcomes. Slowing labor market conditions, uncertainty surrounding Federal Reserve policy, the winding down of quantitative tightening amid incomplete economic data, elevated debt to GDP levels, geopolitical and domestic political risks, and highly concentrated expectations around AI driven growth all present potential headwinds. With expectations already stretched, the margin for error appears minimal, leaving the risk reward profile asymmetrically skewed to the downside.