For much of the last seven years, the stock market has been unstoppable. The benchmark S&P 500 (SNPINDEX: ^GSPC) has gained at least 16% for three consecutive years on three occasions throughout its nearly century-long history. Two of those streaks have occurred over the last seven years (2019-2021 and 2023-2025).
Meanwhile, we’ve watched the iconic Dow Jones Industrial Average (DJINDICES: ^DJI) reach 50,000 and the growth-stock-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) briefly top 24,000.
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Stocks have been fueled by game-changing innovation, such as the artificial intelligence (AI) revolution and the advent of quantum computing, as well as historic share buyback activity by S&P 500 companies.
But when things seem too good to be true on Wall Street, they typically are.
Although the stock market is a time-tested wealth-creating machine (something I’ll touch on in more detail later), it’s also historically expensive. Based on what 155 years of history show, the party may be nearing an end.
To preface the following discussion, “value” is subjective. What one investor believes is pricey might be viewed as a bargain by another.
Nevertheless, one time-tested valuation tool has historically done a phenomenal job of pushing beyond this subjectivity. The metric in question is the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, which is also referred to as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
The Shiller P/E is based on average inflation-adjusted earnings over the previous 10 years. That compares with the traditional P/E ratio (the go-to valuation metric for most investors), which accounts only for trailing 12-month earnings. Whereas recessions or shock events easily trip up the P/E ratio, the CAPE Ratio remains useful.
Although economists didn’t introduce the Shiller P/E until the late 1980s, it’s been back-tested to January 1871. Over 155 years, it’s averaged 17.35.
But as you’ll note, it’s spent much of the last 30 years above this mark. Lower interest rates and the internet revolution, which broke down information barriers between Wall Street and Main Street that had existed for more than a century, paved the way for greater risk-taking by retail investors.
