Despite a volatile March that saw the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) dip into correction territory, and the Dow Jones Industrial Average (DJINDICES: ^DJI) endure a steep pullback, it’s shaping up to be another phenomenal year for Wall Street and investors. Through the closing bell on June 8, the Dow, S&P 500, and Nasdaq had rallied by approximately 6%, 8%, and 12%, respectively, since the year began.
Catalysts have been bountiful, led by the evolution of artificial intelligence, the advent of quantum computing, and record S&P 500 share buybacks in 2025.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Nevertheless, headwinds loom large for Wall Street’s historic rally. While inflation and the Iran war are dominating headlines, perhaps the greatest risk to the stock market has to do with its otherworldly valuation.
The stock market is close to eclipsing its priciest valuation over 155 years
To state the obvious, there isn’t a one-size-fits-all guide to evaluating and valuing public companies or the broader market. The subjectivity that comes with valuing stocks and the broader market is one of the primary reasons short-term moves are so challenging to predict accurately.
Most investors tend to rely on the time-tested price-to-earnings (P/E) ratio as their preferred valuation tool. The P/E ratio is calculated by dividing a company’s share price by its trailing 12-month earnings per share (EPS). While it’s a great tool for quickly evaluating mature businesses, it has its shortcomings with growth stocks and during recessions, when EPS can turn negative.
This is where the S&P 500’s Shiller P/E Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), can be incredibly useful. The Shiller P/E is based on average inflation-adjusted EPS from the previous 10 years, meaning recessions won’t render it useless. It’s the perfect valuation tool to cut through the emotions and subjectivity that can skew valuation analyses.
Though the CAPE Ratio was introduced in the late 1980s, it’s been back-tested to January 1871. Over the last 155 years, it’s averaged a relatively modest multiple of 17.38.
Recently, the S&P 500’s Shiller P/E Ratio peaked at 42.84. That’s the second-highest multiple since 1871, surpassed only by the all-time high of 44.19 in December 1999, just a few months before the dot-com bubble burst.
