Despite some volatility attributable in part to the ongoing conflict between the U.S. and Iran, the S&P 500 (SNPINDEX: ^GSPC) index has still mustered a gain of 8% so far in 2026. Strong gains by technology stocks are offsetting some of the macroeconomic jitters, but history suggests this might not be sustainable for much longer.
Based on one widely followed valuation metric, the S&P 500 has only been this expensive on one other occasion in its entire history, and that was in 2000 at the peak of the dot-com bubble. What followed was one of the steepest declines investors have ever endured, and from the bottom of that trough, it took half a decade for the index to recover and begin setting new highs again. Is history about to repeat itself?
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The S&P 500 has almost never been this expensive
The S&P 500 is made up of 500 large-cap and megacap companies from all 11 different sectors of the U.S. economy, so it’s highly diversified. However, because it’s weighted by market capitalization and companies like Nvidia and Apple are currently the most valuable businesses in the world, more than a third of the value of the index today derives from stocks in the red-hot technology sector.
In May, the S&P 500 crossed a key valuation milestone. Its Shiller Cyclically Adjusted Price-to-Earnings ratio — also known as the Shiller CAPE ratio — rose above 40 for the first time since 1999. It’s now 41.4, which is its highest level since 2000.
The CAPE ratio is calculated by dividing the current price of the S&P 500 by the 10-year moving average of its inflation-adjusted earnings per share (the combined earnings of the index’s 500 companies). It’s often considered a more reliable measure of the index’s valuation than the traditional P/E ratio, which only considers its earnings from the last 12 months.
The S&P 500 peaked around 12 months after its CAPE ratio crossed 40 in 1999, and during the two years after that, the index plummeted by as much as 49%. If a similar decline were to happen today, the S&P 500 would fall to around 3,880, a level not seen since the 2022 bear market.
To make matters worse, after the S&P bottomed out in 2002, it didn’t fully recover and start setting new record highs until five years later in 2007. That means investors who bought the index after its CAPE ratio was above 40 probably didn’t see positive returns on those investments for almost a decade. That’s something retail investors will want to consider before initiating large positions at the current level.
