S&P 500 valuation metric hits 40 for only the third time ever
The stock market valuation just hit a rare 40 multiple.
The short version
- It happened only twice before in the last 28 years.
- Past peaks preceded major downturns in the S&P 500 and Nasdaq.
- Watch your portfolio allocations closely as market valuations climb to historic highs.
The stock market is doing something for only the third time in 28 years, according to The Motley Fool. The artificial intelligence infrastructure build-out has launched the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite to new heights, gaining 82%, 115%, and 154% respectively since the 2022 bear market bottomed.
But beneath the record highs, the market valuation metric known as the Shiller P/E Ratio has clocked in at 40.66, which is 133% above its long-term average of 17.44 over nearly 156 years. A CAPE ratio above 40 is exceptionally rare, having occurred only three times in history, and all since 1999.
The first time was in the lead-up to the dot-com bubble burst in March 2000, when internet-driven euphoria pushed the ratio to 44.19. The second time occurred during the first week of January 2022, fueled by fiscal stimulus amid the COVID-19 pandemic.
The third time spans from May 2026 to the present, remaining consistently above 40 for six months. Historically, when the Shiller P/E ratio tops 40, premium valuations are not well tolerated on Wall Street, and the ensuing correction has lopped off significant value from major indexes.
While bull markets are not indefinite and history cannot guarantee exact timing, understanding these cyclical extremes helps you protect your long-term savings and investments.
