Key Takeaways:
The S&P 500's cyclically adjusted price-to-earnings ratio has held above 40 since early May, a level reached only once before in 150 years of data.
The S&P 500's CAPE ratio has held above 40 since early May 2026, a level reached only once before in the index's history — the dot-com peak of December 1999, when the gauge topped 44.
The metric, which divides price by average inflation-adjusted earnings over the prior decade, has averaged about 17 since the 1870s, according to the Shiller CAPE methodology. Its sustained climb into the 40s marks one of the most expensive equity market valuations ever recorded.
The current stretch differs from 1999 in pace: the ratio climbed gradually over the past year rather than spiking, even as the S&P 500 surged more than 20 percent. The index, Nasdaq Composite, and Dow Jones Industrial Average have all set record highs despite headwinds from inflation, tariffs, and the war in Iran.
History offers a cautionary frame. The 1999 peak came about four months before the dot-com bubble burst, and hundreds of tech companies crashed when it popped. Yet the broader market has recovered from every downturn: since 1919, the S&P 500 has delivered positive total returns over every 20-year period, according to Crestmont Research.
The dot-com era offers the only comparable valuation reading. When the CAPE ratio topped 44 in December 1999, the S&P 500 traded at more than double its long-run average of 17. The bubble burst within months, and hundreds of internet companies were wiped out as the index sank.
The current market has not yet matched that peak — the ratio has hovered just above 40 since May — but the sustained elevation is itself unusual. The CAPE ratio has rarely exceeded 40 at all; holding there for months at a time is rarer still.
Valuation metrics can flag overvaluation, but they cannot time a downturn. The CAPE ratio inched toward 40 for much of the past year while the S&P 500 gained more than 20 percent, meaning investors who exited at the first warning missed substantial gains.
The long-run record favors patience. Crestmont Research's analysis of data since 1919 shows the S&P 500 has posted positive total returns over every 20-year period, regardless of intervening volatility. Quality stocks that survive a downturn have historically driven the recovery, even as weaker names are wiped out.
This article is for informational purposes only and does not constitute investment advice.
