The US Market's Valuation Trap: Which Stocks Still Make Sense Today?

Setting the Context: Why Selectivity Matters Now

After an impressive rally through 2024 and into 2025, US equities have continued their ascent, with the S&P 500 and Nasdaq Composite both touching new heights in September. However, this upward trajectory has come with a significant cost: valuations have stretched considerably. According to FactSet data, the S&P 500 forward price-to-earnings ratio now sits around 22.5, surpassing its five- and ten-year historical averages. The picture looks even more extreme for growth-heavy indices, where the Nasdaq Composite trades at approximately 33 times forward earnings.

This backdrop presents investors with a dilemma. The traditional narrative of “buy the dip” becomes less compelling when entry points are no longer attractive. Yet abandoning equities entirely would be equally short-sighted. The real challenge lies in distinguishing between genuinely attractive opportunities and momentum-driven bubbles.

The Cautionary Tale: Why Expensive Doesn’t Always Mean Quality

Palantir Technologies (NASDAQ: PLTR) serves as a stark reminder that operational excellence does not guarantee investment merit at any price. The company delivered impressive second-quarter results, with revenue surging approximately 48% year-over-year, and management’s guidance suggests acceleration ahead. These are objectively strong fundamentals for a software and artificial intelligence platform.

Yet the market has priced in near-perfection. Trading at a market capitalization around $421 billion against trailing-12-month revenue near $3.4 billion, Palantir commands roughly 124 times sales. While premium valuations can be justified for exceptional businesses, this multiple leaves minimal room for disappointment. Any slowdown in growth trajectory, increased competitive pressure, or delays in federal contract timing could trigger significant multiple compression. This example underscores a critical principle: growth and execution excellence are insufficient if the purchase price is too steep.

The Better Risk-Reward Trade: Beaten-Down Quality Names

Investors seeking genuine opportunities should focus on high-quality operators that have already absorbed negative sentiment and now trade at more reasonable valuations. Two companies exemplify this approach.

Lululemon Athletica (NASDAQ: LULU) provides a compelling example of a premium brand temporarily out of favor. Earlier in 2025, the company guided lower following softer demand patterns in the US market, projecting 2025 revenue growth between 2% and 4%, with earnings per share guidance of $12.77 to $12.97. This disappointment sent shares retreating sharply from late-2024 highs, with recent prices clustering in the mid-$170s.

At these levels, the stock trades at approximately 14 times the midpoint of its earnings guidance—a valuation far removed from “priced for perfection” territory. The underlying business remains sound: international expansion continues as a growth catalyst, the balance sheet is fortress-like, and gross margins remain healthy relative to retail peer groups. Macro risks—namely a prolonged US economic slowdown and tariff-driven cost pressures—deserve attention, but with expectations recalibrated and valuation compressed, the risk-reward profile is considerably more balanced.

Old Dominion Freight Line (NASDAQ: ODFL) demonstrates similar principles in the transportation sector. Widely regarded as the most efficiently operated less-than-truckload carrier in the country, Old Dominion faced headwinds throughout 2025. Second-quarter results reflected this pressure: revenue declined on a year-over-year basis amid subdued industrial activity, and the operating ratio deteriorated to 74.6% from 71.9% in the prior year period.

CEO Marty Freeman acknowledged the challenging environment in the second-quarter earnings call, noting that “while the challenging macroeconomic backdrop created demand headwinds for our business during the quarter, our market share remained relatively consistent and our team continued to execute on our long-term strategic plan.” Management’s commitment to its proven playbook—service quality, cost discipline, and network density—remains steadfast during this cyclical trough.

From a valuation standpoint, Old Dominion’s premium has cooled meaningfully. Current prices imply a price-to-earnings multiple in the high 20s, which appears expensive in isolation. However, this multiple is anchored to cyclically depressed earnings. Should industrial demand normalize and pricing power return in 2026, the valuation premium may prove entirely justified. The downside risk is clear: an extended slowdown in industrial activity could keep revenue and margins under pressure longer than anticipated.

Applying Today’s Lesson

The fundamental message for investors navigating this market environment is straightforward: avoid complacency around valuation, but do not abandon equities altogether. Instead, adopt a more disciplined approach that emphasizes selectivity.

The optimal strategy involves gravitating toward established, high-quality enterprises whose stock prices have already absorbed available bad news and now trade at defensible, if not outright cheap, valuations. Companies like Lululemon and Old Dominion fit this profile. Conversely, continuing to chase momentum favorites trading at extreme multiples offers minimal margin for error and exposes portfolios to unnecessary decompression risk when sentiment inevitably shifts.

In essence, this market environment rewards a return to first principles: patience, discipline, and a willingness to let valuation discipline guide decision-making rather than fear of missing out.