The S&P 500's Shiller P/E ratio closed at 41.60 on Sept. 21, only the third time in 156 years the measure has topped 40. The previous two instances, in 1999 and 2022, both preceded sharp bear markets for the Dow, S&P 500, and Nasdaq Composite.
The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all pushed to fresh record highs this year. The S&P 500 trades at 7,743.41, up 0.5% on the session. The Dow has climbed 0.9% to 51,828.62, and the Nasdaq has added 0.5% to reach 27,068.72.
Behind the gains sit several catalysts: the artificial intelligence infrastructure build-out, better-than-expected corporate earnings, record share repurchases by S&P 500 companies, and a wave of initial public offering activity. But one long-tested valuation tool is flashing a warning that the rally has stretched valuations to a rare extreme.
The Shiller P/E has only crossed 40 twice before
The Shiller P/E ratio, or CAPE Ratio, measures average inflation-adjusted earnings over the trailing decade. Backtested to January 1871, the ratio has averaged 17.42 over that 156-year span.
Including the current reading, the CAPE Ratio has topped 40 only three times. From January 1999 to September 2000, it reached a record 44.19 in December 1999, months before the dot-com bubble burst; the S&P 500 and Nasdaq Composite subsequently lost 49% and 78% of their value by October 2002. In the first week of January 2022, the ratio briefly exceeded 40 again, and the 2022 bear market that followed erased a fifth, a quarter, and a third of the Dow's, S&P 500's, and Nasdaq's respective values over nine months. The ratio has now held above 40 consistently since May 2026.
Additional headwinds include rising margin debt and the potential for an extended Fed rate-hiking cycle.
History still favors patient investors
Bear markets and bull markets are not symmetrical. According to Bespoke Investment Group, the average S&P 500 bear market over the last 97 years has bottomed in 286 calendar days, while the typical bull market has run 3.6 times as long, at 1,023 calendar days.
Crestmont Research examined 107 rolling 20-year total-return periods for the S&P 500 since 1900 through 2025, tracking earlier index components before the S&P 500 officially launched in 1923. Every one of those 107 periods produced a positive annualized return. If the Shiller P/E's signal holds and a downturn follows, history suggests it would eventually open a buying opportunity for investors who can hold for the long run.
Source: The Motley Fool
Trading involves risk.
Risk Disclaimer
