Sean Williams, The Motley Fool
6 min read
Despite the Iran war-driven swoon in March, it’s shaping up to be another stellar year for Wall Street and investors. On June 2, the celebrated Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) all galloped to record closes.
These gains have been fueled by several factors, including:
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The evolution and proliferation of artificial intelligence (AI)
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A historically low corporate income tax rate, which powered record S&P 500 share buybacks in 2025.
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Better-than-expected corporate earnings
But this parabolic move higher for Wall Street may be more precarious than this trio of leading indexes suggests. The stock market is on the verge of making dubious history — the type that hasn’t been witnessed over the last 155 years — and the implications for Wall Street and investors are downright frightening.
The stock market is within eyeshot of its priciest valuation in history
On the heels of the AI revolution, the stock market is nearing its priciest valuation in history.
To preface this discussion, “value” is a subjective term that varies from one investor to the next. Without a one-size-fits-all blueprint to evaluate public companies, one person’s trash can truly be another’s treasure on Wall Street.
With the above said, there is one valuation tool that consistently cuts through the emotional and subjective aspects of investing: the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio. You’ll sometimes see the Shiller P/E referred to as the Cyclically Adjusted P/E Ratio, or CAPE Ratio.
Unlike the traditional P/E ratio, which is based on trailing 12-month earnings per share (EPS), the Shiller P/E accounts for average inflation-adjusted EPS over 10 years. A more encompassing view ensures that the Shiller P/E maintains its usefulness in any economic climate.
Although economists introduced the CAPE Ratio in the late 1980s, it’s been back-tested to January 1871, providing 155 years of price-to-EPS data. Whereas the CAPE Ratio has averaged approximately 17.38 since January 1871, the S&P 500’s Shiller P/E closed out the June 2 trading session at 42.84.
