Sean Williams, The Motley Fool
7 min read
Despite a short-lived swoon in March, the stock market is delivering another banner year for investors. During the first week of June, the timeless Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) all reached fresh record-closing highs.
Catalysts have been plentiful for investors, with the stock market’s historic rally driven by:
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 »
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The evolution of artificial intelligence (AI)
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The advent and early stage proliferation of quantum computing
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Record S&P 500 share buybacks in 2025
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Better-than-expected corporate earnings
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Initial public offering euphoria, courtesy of Space Exploration Technologies (SpaceX)
However, even the most powerful bull markets have their limits. One of Wall Street’s perceived-to-be unbreakable records is currently within eyeshot of being toppled. Should this historic event take place, it would have terrifying implications for the stock market.
A 155-year record is on the verge of being broken — and that’s terrible news for Wall Street
To preface the following discussion, the past can’t concretely guarantee the future. Nevertheless, history has a way of rhyming on Wall Street, making the past an excellent teacher and/or predictor of the future, more often than not.
In addition to the AI revolution sparking investor excitement and driving up long-term growth projections, this game-changing innovation has spearheaded a historic expansion of valuation multiples on Wall Street.
The most time-tested of all valuation tools is the price-to-earnings (P/E) ratio, which is calculated by dividing a company’s share price by its trailing 12-month earnings per share (EPS). The traditional P/E ratio is a fantastic tool for quickly evaluating mature businesses — but it’s not perfect. Since the P/E ratio only accounts for 12 months of EPS history, recessions that turn profits into losses can render this valuation tool useless.
This is where the S&P 500’s Shiller P/E Ratio separates itself. The Shiller P/E, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), is based on average inflation-adjusted EPS over the trailing decade. Accounting for 10 years of EPS history ensures that the Shiller P/E remains useful at all times and can provide apples-to-apples valuation comparisons of the S&P 500 throughout history.
