What Happened After The Last Time The S&P 500's Forward P/E Was This High
News Summary
The article highlights that the S&P 500's current forward P/E multiple stands at 22.9x, significantly above its 10-year average of 18.6x. Despite seemingly high valuations, historical data suggests that valuation ratios alone are not reliable predictors of short-term price movements, and even for long-term returns, their signal is far from perfect. Looking back to 2020, the S&P 500's forward P/E peaked at 23.6x when the index was around 3,500. Today, the index is near 6,900, having nearly doubled in five years. The article explains that this doubling, despite a relatively unchanged P/E ratio, is attributed to corporate earnings also doubling during the period, bolstered by stubbornly high profit margins. While the market journey was not smooth, including a bear market in 2022 and a 19% rout earlier in 2025, the article emphasizes that most investors struggle to time the market profitably. Moving forward, P/E multiples can compress either from falling prices or from earnings rising faster than prices. Earnings are identified as the critical long-term driver of stock prices, with double-digit growth expected through at least 2027. Thus, while elevated valuations will continue to prompt concerns about market tumbles, such sell-offs are not guaranteed and are incredibly difficult to trade profitably.
Background
The current market context sees the S&P 500 index nearing 6,900 in 2025, with a forward P/E multiple of 22.9x, which is above its 10-year average of 18.6x. The article references the market rebound in 2020 following the pandemic lows, when the forward P/E surged to 23.6x. This comparison provides a historical context for current elevated valuations. Additionally, it mentions the bear market in 2022 and a market rout earlier in 2025, indicating that market volatility and corrections are normal occurrences even within broader uptrends.
In-Depth AI Insights
What does the critical role of earnings growth imply for the current high-valuation market? - The article highlights that the S&P 500's price doubled over the past five years despite a relatively stable valuation, fundamentally driven by a parallel doubling in corporate earnings. This suggests that when analyzing market valuations, a singular focus on the absolute P/E level can be misleading; instead, the emphasis should be on the sustainability of earnings growth. - For investors, this means that even if the overall market P/E appears elevated, if companies can consistently deliver strong earnings growth (as the article projects double-digit growth through 2027), there is still room for stock appreciation, and valuations could normalize through