The S&P 500's valuation is approaching a historic level, according to Motley Fool analyst Anthony Di Pizio. He points to geopolitical conflict, rising interest rates and turbulence in the AI industry as risks to the bull market.
The S&P 500's Shiller cyclically adjusted price-to-earnings (CAPE) ratio recently hit 41, close to its all-time high of 44.2 from the dot-com peak in 2000. The index has more than doubled from its 2022 bear market low, driven by returns from the technology sector.
Di Pizio is not predicting a repeat of the dot-com crash, but he says the mounting risks are getting harder to ignore. The S&P 500 fell 49% when that bubble burst.
Oil and inflation drive rate hikes
Di Pizio says the U.S. and Iran have been locked in a conflict since late February, closing the Strait of Hormuz, through which 25% of the world's seaborne oil travels each day. West Texas Intermediate crude was trading above $103 per barrel last Friday, up from its 2026 opening price of $57.
As a result, the Consumer Price Index rose at an annualized rate of 3.7% in September, with the energy component up 20.4%. The Federal Reserve raised interest rates by 25 basis points last month. Di Pizio writes that more rate hikes will almost certainly follow if inflationary pressures persist.
AI stocks feel the pressure
Rising interest rates also threaten the AI infrastructure boom. CoreWeave stock is down more than 70% from its peak as neocloud companies face soaring borrowing costs. Australian data center company Firmus had to cancel its initial public offering because of a lack of investor demand.
Recent reports suggest Anthropic could face a $500 billion cut from its $2 trillion expected valuation at its upcoming IPO. The iShares Semiconductor ETF is already down 27% from its peak.
Staying invested through sell-offs
The S&P 500 was only down 2.5% from its peak as of last Friday's close, but Di Pizio thinks further downside is ahead.
According to Capital Group, the index suffers a decline of 10% or more every 18 months, on average. The S&P 500 has delivered a compound annual return of 10.7% since 1957, even after every sell-off, correction and bear market.
Source: The Motley Fool
Trading involves risk.
Risk Disclaimer
