S&P 500 Shiller P/E nears 156-year valuation record

The S&P 500 Shiller P/E ratio stood at 41.67 as of the October 5 closing bell, placing the benchmark within striking distance of its all-time high of 44.19 set in December 1999. This valuation level represents the highest premium in the index's roughly 156-year history, a period for which the Cyclically Adjusted P/E Ratio has been backtested to January 1871. While the average Shiller P/E over this span is 17.42, current levels suggest a market trading at a significant premium to historical norms.

Historical precedent indicates that extreme valuations often precede significant market downturns. The first time the CAPE ratio surpassed 30 occurred in August and September 1929, followed by the Great Depression, during which the Dow Jones Industrial Average lost 89% of its value from peak to trough. The ratio exceeded 30 again in the fourth quarter of 2018, leading to an approximate 20% loss in the S&P 500, and again before the February-March 2020 crash, which wiped away 34% of the index's value in 33 calendar days. When the ratio first exceeded 40 during the dot-com era, the S&P 500 and Nasdaq Composite lost 49% and 78% of their respective values by October 2002.

Analysts at Bespoke Investment Group examined the duration of 27 separate S&P 500 bull and bear market events since September 1929 to provide context on market cycles. Their data shows that the average bear market reaches its trough in 286 calendar days, with no bear market lasting longer than 630 days over the last 97 years. In contrast, the typical S&P 500 bull market persists for an average of 1,023 calendar days. Fourteen of the 27 recorded bull markets lasted longer than the longest bear market in that dataset.

Crestmont Research calculated rolling 20-year total returns, including dividends, for the S&P 500 since 1900. The analysis produced 107 rolling 20-year periods, all of which generated a positive average annual total return. This data suggests that long-term investors who held through major downturns such as the Great Depression or the dot-com bubble realized positive returns over those extended periods.