The S&P 500 just hit another all-time high. Congrats if you held through the Iran drama and the 10% correction that came with it. But here’s the thing nobody wants to hear at a party: just because we’re at record prices doesn’t mean the party’s going to last.
Let’s talk about what’s actually changed since January. We’re still in a war with Iran. Peace talks failed once already. Oil is way higher than it was at the start of the year—Goldman Sachs is even warning that a supply shock could tank the S&P to 5,400. Inflation hit a two-year high of 3.3% in March, mostly because gas prices went absolutely bonkers. And traders? They’ve pushed rate-cut expectations all the way to mid-2027. That’s a massive shift from what everyone was expecting in January.
So yeah, we’re at new highs. But are we actually pricing in all these risks? Maybe. But that’s not even the real question.
The real question is: what kind of returns can you actually expect from here?
The Valuation Elephant in the Room
There’s this metric called the CAPE ratio—Cyclically Adjusted Price-to-Earnings ratio. It was developed by Nobel laureate Robert Shiller, and it’s basically the market’s report card on whether stocks are expensive or cheap. It compares stock prices to 10 years of inflation-adjusted earnings.
The logic is simple: pay a high price now, earn lower returns later. Pay a low price now, earn higher returns later.
Right now? We’re sitting at a CAPE of almost 41.
That’s the second-highest reading in over 140 years of market history. The only time it was higher was during the dot-com bubble. Yeah, that dot-com bubble.
Here’s where it gets uncomfortable: when the CAPE has been above 35, forward 10-year returns have mostly clustered between 0% and 5% annually. Some periods actually produced negative returns. A 2024 academic paper confirmed this pattern holds up—starting valuations explain a meaningful chunk of what you’ll actually earn over the next decade.
But Wait, This Time Is Different, Right?
Every time valuation metrics flash a warning, someone inevitably says: “Interest rates are lower now!” or “Tech companies have better margins!” or “The old rules don’t apply anymore!”
Research Affiliates looked at all these arguments. Their verdict? Some have merit. There are legitimate reasons to think valuations can be modestly higher today than the 20th-century average.
But none of them explain a CAPE of 40.
And here’s the kicker: even if today’s elevated valuations never come back down—even if they’re here to stay forever—that still means lower future returns. It’s just math. When you pay a high price for future cash flows, the math of what you’ll earn going forward is simply lower.
So What Now?
This isn’t a “sell everything” signal. The CAPE said the market was expensive in 2018, and investors who bailed missed a huge bull run. This is a long-game lens, not a panic button.
But you should be aware of it. We’re at record highs with stretched valuations. That’s not a reason to hide in cash, but it’s definitely a reason to be thoughtful about how you participate.
