The Stock Market Is More Expensive Than 94% of History—Here’s What That Actually Means

With the CAPE ratio hovering near 37.8, forward P/E multiples brushing speculative levels, and sentiment metrics flashing frothy, today's environment mirrors only a handful of periods in financial history: 1999, 2007, and 2021. 

Each of those chapters brought with them regime shifts—not because of a catalyst in the moment, but because markets eventually struggled to justify the premium investors were paying.

This isn’t a doom-and-gloom warning. It’s a clarity signal. Investing at high valuations doesn’t guarantee poor outcomes, but it reshapes the probability landscape. Forward returns tend to compress, volatility becomes the norm, and the assumptions underpinning traditional portfolio models begin to buckle. 

This report doesn’t aim to predict the next move—it aims to prepare you for a range of plausible ones. Because how you act in these periods of overvaluation has a disproportionate impact on your 10- to 20-year wealth arc.

Back Near the Edge: CAPE Ratio Reclaims Historic Extremes

The CAPE ratio—Robert Shiller’s widely watched metric of market valuation based on inflation-adjusted, 10-year average earnings—is back in rarified air. As this chart shows, the S&P 500’s CAPE has rebounded from a post-2022 trough of 28.3 to 37.8 as of mid-2025. That puts it above 94% of all historical readings going back 150 years. In simpler terms, investors today are paying nearly 38 times the average earnings of the past decade—a valuation level rarely seen outside of the dot-com bubble or the liquidity surge of 2021.

The implications of a high CAPE ratio aren’t necessarily immediate or dramatic, but they are profound over longer horizons. Elevated valuations compress the cushion investors have for error. If earnings growth disappoints, inflation persists, or interest rates fail to normalize, the downside risks increase meaningfully. What this chart offers is not a forecast, but a flashing yellow light: the higher the starting valuation, the lower the odds of strong real returns over the next 10 to 15 years. In that context, today's market looks priced for perfection—and that should prompt deeper thinking about risk, allocation, and return expectations.

Key Insights from chart:

• CAPE has surged back to 37.8, near its previous highs in 2021 (38.3) and well above the long-term average of ~17. This suggests investors are once again paying a historic premium for earnings.

• The rebound followed a brief valuation reset, with the CAPE falling to 28.3 in early 2023 amid Fed tightening and macro uncertainty. But those risks have seemingly been re-priced—or overlooked—as market enthusiasm returned.

• This isn’t just about sentiment—it’s about structural optimism: Markets are implicitly betting on a soft landing, sustained earnings growth, and a new era of productivity gains, much of it AI-driven.

• Historical analogs are cautionary: Similar CAPE peaks (1929, 1999, 2021) were often followed by extended periods of low or negative real returns—even if nominal returns looked acceptable. Inflation and volatility often chipped away at purchasing power.

• Valuation is not timing—but it is trajectory: A high CAPE doesn’t predict the next quarter, but it’s one of the strongest signals for what to expect over the next 10–15 years in terms of average returns.

• Implication for investors: In regimes like this, traditional 60/40 portfolios may underperform expectations. More nuanced strategies—value tilt, active risk management, private markets, or inflation-hedged assets—can help manage the asymmetry of outcomes.

Not a reason to sell—but a reason to rethink: This is a moment to revisit long-term assumptions, rebalance toward durability, and ensure that portfolio construction reflects both opportunity and risk—not just momentum.

Welcome to the Whipsaw: Volatility Is the Price of Admission

If high valuations tell us where we are in the market cycle, volatility tells us how it feels to be there. This chart tracks the month-over-month percentage change in S&P 500 opening prices from 2021 through August 2025. 

What it reveals is not just noise, but a persistent undercurrent of instability. Sharp monthly swings—up 9.1% in one stretch, down 9.3% in another—signal a market struggling to find narrative footing amid extreme valuations, macro uncertainty, and sentiment shifts.

This is what it looks like when markets operate in rarefied air. As the CAPE ratio returns to near-dot-com highs and the Buffett Indicator flashes red, price action becomes more sensitive—not just to earnings or rates, but to psychology. 

Investors shouldn’t see this volatility as anomalous. It’s a natural outgrowth of markets priced for perfection. When every assumption must go right to justify prices, even minor surprises can cause major moves.

Key Insights:

• Volatility is persistent—not episodic: Rather than isolated spikes, the chart shows an ongoing pattern of large monthly moves, reinforcing the idea that we’re in a structurally unstable phase.

• Extreme monthly moves in both directions (e.g., +9.1%, –9.3%) reflect how quickly investor narratives can flip—from AI-fueled optimism to inflation fears to rate anxieties—without changing long-term fundamentals.

• Post-2022 volatility coincides with valuation compression and rebound: This aligns directly with the CAPE chart, where the drop in valuations (2022) and resurgence (2024–2025) map to instability in price action.

• Behavioral sensitivity is high: Markets this richly priced often move not on earnings surprises, but on expectations about expectations. That’s a far more fragile anchor for long-term wealth building.

• Implication for investors: High volatility is a feature, not a bug, of expensive markets. That suggests the need for both portfolio resilience (diversification, liquidity) and psychological readiness to stay disciplined amid drawdowns.

Connection to the thesis: 94% of the time, markets aren’t this expensive. And when they are, history shows that volatility tends to be a leading indicator of future regime shifts—whether into stagflation, rotation, or revaluation.

Valuation Tension: Pricing in Perfection, or Just Possible?

Markets are pricing in a very specific narrative—and this chart shows just how narrow that narrative is. The S&P 500 is currently sitting at 6,390. According to 2025 consensus earnings of $264, that puts us at exactly a 24x forward P/E multiple. Alternatively, if earnings fall short and 2024’s consensus of $240 proves more accurate, we’re looking at a 27x multiple. 

That’s not just elevated—it’s rarefied. This matrix illustrates the tightrope we’re walking: if earnings growth hits expectations and multiples hold, things look justifiable. But if either falters, the cushion disappears quickly.

At extremes like this, the market leaves very little room for error. The valuations implied here are not neutral—they’re optimistic. They bake in strong earnings growth, continued macro stability, and persistent investor confidence. 

And while markets can certainly stay expensive longer than people expect, the historical record is clear: periods like this have often marked the beginning of regime shifts, not smooth sailing.

Key Insights:

• The S&P 500 at 6,390 implies a 24x forward P/E based on 2025 consensus EPS of $264—well above the long-term average of ~16–17x.

• If actual earnings align closer to 2024’s consensus ($240), then the current index level represents a 27x multiple—territory typically reserved for speculative booms.

• Each row and column offers a scenario framework: this matrix isn't just data—it's a toolkit for stress-testing expectations. A small shift in earnings or sentiment could dramatically reprice the market.

• Multiple compression is the silent risk: even if earnings grow, a return to 20–22x P/E would imply a meaningful market pullback unless EPS materially exceeds forecasts.

• Connection to the core thesis: With valuations more expensive than 94% of history, forward returns will be shaped less by macro narratives and more by the hard math of earnings delivery versus multiple normalization.

Investor takeaway: In pricing terms, we’re already “there.” The market has pulled forward a lot of optimism. That doesn’t make a correction inevitable—but it makes complacency dangerous.

The Long Arc of Risk: What History Reveals About Peak Markets

The S&P 500’s long-term chart is both awe-inspiring and humbling. Since 1964, the market has delivered extraordinary gains—compounding wealth across generations. But the climb hasn’t been linear. This chart marks three defining shocks: the dot-com bust, the global financial crisis, and the Covid-19 pandemic. 

Each episode punctured investor confidence, reset valuations, and rewrote the rules of engagement for a time. And each one emerged from periods of elevated market expectations.

Now, in 2025, we are again approaching the vertical edge of the chart—a steep climb marked by extreme valuations, frothy sentiment, and stretched fundamentals. The question isn’t whether equities are a good long-term bet (they are), but what kind of return trajectory we should expect when we start from near-record levels of CAPE, Buffett Indicator readings, and forward P/E multiples. This visual invites us to learn from the past: the greatest long-term gains have come after periods of adjustment—not during times when everything felt priced for perfection.

Key takeaways from chart:

• Every major market dislocation in modern history followed valuation excess: The late ‘90s dot-com boom, mid-2000s housing-driven leverage cycle, and 2021–2022 stimulus surge each preceded sharp corrections.

• Recovery followed each crash—but it took time: After the 2000 and 2008 drawdowns, it took years to reclaim prior highs. Starting valuations mattered more than any single macro factor in shaping return paths.

• Markets reward patience—but punish complacency: The long-term investor wins by staying in the game—but being unaware of where we are in the cycle leads to avoidable drawdowns and missed tactical pivots.

• Where we are now resembles previous peaks: Valuations are elevated, momentum is strong, and narratives are bullish. That doesn’t mean a crash is next—but it does mean this is likely a turning point, not a straight continuation.

• Connection to the thesis: When markets are more expensive than 94% of history, forward-looking return assumptions must be recalibrated. Historical cycles suggest that adjusting portfolios proactively in these moments—before the downturn—can alter a 10–20 year wealth arc meaningfully.

This chart isn’t a reason to exit—it’s a reason to align: Investors who blend strategic patience with valuation-aware discipline tend to emerge strongest from inflection points like these.

Conclusion: Time to Recalibrate, Not Retreat

We’ve walked through a series of charts that tell a consistent story: valuations are high, volatility is structural, market expectations are stretched, and history is instructive. The CAPE ratio is back to dot-com levels. Price swings are sharp and directionless. The S&P 500 is priced for optimistic earnings outcomes. And the long-term chart reminds us that every vertical climb eventually meets gravity.

This doesn’t mean investors should abandon equities. It means they should reassess their expectations and rebalance their approach. When the market is more expensive than 94% of history, the baseline assumption should shift—from compounding through momentum to compounding through resilience. That means tilting toward valuation-aware strategies, stress-testing portfolios for multiple contraction, and being prepared for nonlinear outcomes.

The next decade of wealth creation will look different from the last. Those who recognize that early—who understand where we are in the cycle and adjust accordingly—will be best positioned to not just endure the next regime, but to lead through it.