Everyone wants to know if the stock market is "too expensive" right now. It's the million-dollar question—literally. To find the answer, most investors look at one specific metric: the S&P 500 PE ratio over time. But honestly? Most people read the chart wrong. They see a number higher than 20 and start panic-selling, or they see a low number and think it's a "screaming buy" without realizing the "E" in PE (earnings) might be about to fall off a cliff.
Value is subjective. The price you pay for $1 of earnings today isn't the same as what your grandfather paid in 1960, and there are very good reasons for that.
The Long View: Decades of Moving Goalposts
If you look at the broad sweep of history, the S&P 500 PE ratio over time averages out to somewhere around 16. That’s the "mean." But the mean is a bit of a liar. Since the early 1990s, the market has spent the vast majority of its time well above that historical average.
Why?
Interest rates. When you can get a 10% return on a boring government bond—like you could in the early 1980s—you aren't going to pay a high multiple for stocks. Why take the risk? But in a world where interest rates sat near zero for a decade, a PE ratio of 20 or 25 actually looked like a bargain.
Robert Shiller, the Yale professor who basically won a Nobel Prize for looking at this stuff, created the CAPE ratio (Cyclically Adjusted Price-to-Earnings). He didn't just look at one year; he looked at ten. He wanted to smooth out the noise. What he found was that while the S&P 500 PE ratio over time tends to "mean revert," those cycles can take decades to play out. You could stay "overvalued" for your entire working career.
The Great Outliers
Think back to the Dot-com bubble. In late 1999 and early 2000, the PE ratio spiked to over 30. People were paying for "eyeballs" and "clicks," not actual cash flow. Then the crash happened.
But wait.
👉 See also: Why 425 Market Street San Francisco California 94105 Stays Relevant in a Remote World
The highest the PE ratio ever reached wasn't during the tech boom. It was in 2009, right after the Great Financial Crisis.
This is where it gets counterintuitive. The PE ratio skyrocketed to over 120. Was the market the most expensive it had ever been? No. It was actually one of the best times in history to buy. The "P" (price) had dropped, but the "E" (earnings) had completely evaporated because banks were collapsing and commerce hit a wall. When earnings hit zero, the math breaks. That’s the danger of looking at a single data point in the S&P 500 PE ratio over time without context.
Why Today’s Market Isn’t Your Father’s Market
The S&P 500 today is a different beast than it was in 1970. Back then, the index was heavy on "Old Economy" stuff. Steel. Oil. Manufacturing. These companies have massive overhead, factories that rust, and high capital expenditures. They should have low PE ratios because their growth is capped by physical reality.
Today? The index is dominated by Apple, Microsoft, Alphabet, and Nvidia.
Software has infinite scalability. Once you write the code, selling it to the millionth person costs almost nothing. These high-margin, asset-light businesses naturally command higher multiples. If you’re waiting for the S&P 500 PE ratio over time to return to its 1950s average of 12, you might be waiting until you’re 100 years old. It’s probably not happening.
The composition of the index matters more than the number itself.
The Role of Inflation
Inflation is the ultimate PE killer. When prices are rising fast, the Federal Reserve hikes rates. We saw this in 2022. As rates go up, the "discount rate" applied to future earnings goes up too.
✨ Don't miss: Is Today a Holiday for the Stock Market? What You Need to Know Before the Opening Bell
Basically, a dollar earned ten years from now is worth much less today if inflation is 8% than if it’s 2%. That’s why growth stocks—the ones that promise big profits way off in the future—get hammered when inflation spikes. They are "long duration" assets.
The Myth of the "Perfect" Entry Point
I’ve met a lot of people who sat on the sidelines in 2015 because the PE ratio was 18 and the "historical average" was 15. They felt smart. They felt disciplined.
They also missed out on a massive bull market.
Valuation is a terrible timing tool. It’s a great way to measure risk, but it’s a lousy way to predict what the market will do next Tuesday. The S&P 500 PE ratio over time can stay elevated for a long, long time if the underlying economy is healthy and productivity is rising.
Think about the late 90s again. The market was "expensive" by 1996. If you sold then, you missed three years of the most parabolic gains in history. You were "right" about the valuation, but you were "wrong" about the bank account.
Context is King
You have to look at:
- Earnings Yield: This is just the PE ratio flipped upside down (E divided by P). If the PE is 20, the earnings yield is 5%. If a 10-year Treasury bond pays 4%, stocks still look okay. If the bond pays 6%, stocks look risky.
- Forward PE vs. Trailing PE: Trailing PE looks at the last 12 months. It's history. Forward PE looks at what analysts think will happen in the next 12 months. Analysts are often too optimistic, but the market trades on the future, not the past.
- Profit Margins: Are earnings high because companies are efficient, or because they’ve just cut costs to the bone? High margins tend to attract competition, which eventually brings margins—and PE ratios—back down.
What History Actually Teaches Us
The S&P 500 PE ratio over time is a thermometer. It tells you if the market has a fever. It doesn't necessarily tell you when the fever will break or if the patient is actually dying.
🔗 Read more: Olin Corporation Stock Price: What Most People Get Wrong
In the 1970s, during the "Nifty Fifty" era, people paid 50x or 60x earnings for "Blue Chip" stocks like Polaroid and Xerox. They thought these companies couldn't lose. They were wrong. But they weren't wrong because the PE was high; they were wrong because the business models failed or the world changed.
The "E" part of the equation is always the hardest to predict. Companies are incredibly good at finding ways to grow. Just when we think the S&P 500 has hit a ceiling, a new technology—like AI or the internet—comes along and resets the expectations for what those companies can earn.
How to Use This Information
Don't treat the S&P 500 PE ratio over time as a red light or green light. Treat it as a "check engine" light.
If the ratio is significantly above 25, it’s a signal to be cautious. It means you are paying a premium for growth, and if that growth doesn't show up, the "P" is going to drop hard to meet the "E."
Conversely, if the PE ratio is at 12 or 13, it usually means the world feels like it’s ending. That’s usually when the best money is made. But you need the stomach for it.
Actionable Steps for Your Portfolio
Instead of obsessing over the daily fluctuations of the multiple, focus on these three things to stay grounded:
- Compare the Earnings Yield to the Risk-Free Rate. Take 1 divided by the current PE ratio. If that number isn't at least 1% or 2% higher than the 10-year Treasury yield, the market is asking you to take a lot of risk for very little extra reward.
- Look at the "Equal Weight" S&P 500 PE. Sometimes the 10 biggest companies (like Apple and Nvidia) have huge PEs that skew the whole index. The "Equal Weight" version treats every company the same. If that ratio is much lower, the "average" stock might actually be cheap, even if the index looks expensive.
- Check the Earnings Growth Rate. A PE of 30 is fine if earnings are growing at 30%. A PE of 15 is a disaster if earnings are shrinking by 10%. Always pair the valuation with the growth trend.
- Dollar Cost Average. Since nobody—not even the "experts" on TV—can accurately predict when the S&P 500 PE ratio over time will peak or bottom, the best move for most people is to keep buying regardless of the number. This forces you to buy more shares when the PE is low and fewer shares when the PE is high.
The history of the S&P 500 PE ratio over time is a history of human emotion. It’s a chart of greed and fear. When people are excited, they pay more. When they are scared, they pay less. Your job isn't to beat the chart; it's to make sure you aren't the one overpaying when the party is at its loudest.
Stay skeptical of "this time is different" narratives, but don't be so tethered to 1950s data that you miss the reality of the 21st-century economy. The middle ground is where the profit lives.