Peak Valuations & The Implausibility of Worry

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The current state of affairs, as observed from a reasonably safe distance (preferably with a cup of something warm), is causing a predictable amount of hand-wringing. Investors, consumers – even the houseplants seem vaguely anxious. The State Street SPDR S&P 500 ETF Trust (SPY 0.57%) has, quite dramatically, fallen a whole 3% since the start of 2026. A catastrophe, naturally. This has understandably shaken those who’ve become accustomed to the stock market behaving rather like a particularly enthusiastic puppy – constantly leaping upwards. And despite this minor dip, the market still insists on valuing itself at levels that, shall we say, require a certain suspension of disbelief. One indicator, in particular, is shouting – though, being an indicator, it’s mostly just flashing numbers.

This Stock Market Indicator Is…Pointing

The Price-to-Earnings ratio. A concept so elegantly simple, it’s almost insulting. It essentially attempts to quantify how much investors are willing to pay for a dollar of accounting profits. (Accounting profits, of course, being a construct of human imagination, and therefore subject to the usual limitations of imagination – namely, that it’s often wildly inaccurate.) By averaging these ratios across the entire S&P 500, one can arrive at a figure that vaguely resembles the market’s overall valuation. It’s a bit like trying to calculate the average temperature of a goldfish bowl – statistically valid, but not necessarily meaningful.

Since 1870 – the first year anyone bothered to keep track of this particular madness – U.S. stock markets have averaged a P/E ratio of 15. The median is slightly higher, at 16. This suggests that, historically, investors have been reasonably sensible. (Reasonable, in this context, meaning “not entirely irrational.”) Currently, however, the S&P 500 is trading at a P/E of 29. This is, to put it mildly, a bit…enthusiastic. The only other times the market has dared to venture into such rarefied air were immediately before the dot-com bubble burst in 2000, during the frantic weeks leading up to the 2008 financial crisis, and during that brief, unsettling moment in 2020 when everyone briefly thought the world was ending. (It wasn’t, of course. Just a temporary glitch in the matrix.)

It is, undeniably, a peculiar time to be allocating capital. But here’s a thought: historically, investing at the very peak of a bubble has, surprisingly, often been a profitable strategy – provided you have the patience of a geological formation.

Is There Ever a Bad Time to Invest?

Let’s consider a hypothetical scenario. Suppose you stubbornly continued to invest in the SPY S&P 500 index fund even at the absolute zenith of the dot-com bubble. Today, you’d be sitting on a profit of over 300%, dividends included. (Dividends, those small, occasional acknowledgements that companies are, in fact, generating some actual value.) Made the mistake of investing just before the financial crisis? No worries. You’d still be enjoying a gain of around 350%. And if, in a moment of breathtaking optimism, you decided to deploy capital just before the 2020 pandemic correction wiped out hundreds of billions of dollars? Well, over the next six years, your money would have doubled. (Which, if you think about it, is rather impressive for something that was briefly worth almost nothing.)

None of this is to suggest that stock markets won’t be remarkably volatile in the near future. They almost certainly will be. This may indeed prove to be a terrible time to invest over the short term. But over the long haul, the most crucial element of investment success has consistently been simply getting your money invested, rather than waiting for a mythical “perfect moment.” (The perfect moment, incidentally, is a concept invented by financial advisors to justify their existence.)

Those with limited resources, such as individuals on a fixed income, may wish to adopt a more defensive posture. But if you have a long investment horizon and the capacity for patience, don’t be alarmed by the current valuations. Remember, the market is not a rational entity. It’s more like a particularly excitable swarm of bees. And trying to predict its behavior is, at best, a futile exercise. (And at worst, financially ruinous.)

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2026-03-16 08:32