Finance

Can the S&P 500’s Record Highs Survive? Why the Shiller P/E Ratio Signals Caution

S&P 500 hits all-time high, but a high valuation ratio raises concerns about a potential market correction.

byAndres Castro

October 27, 2025, 10:26 AM

A digital stock market ticker showing US indices on September 25, 2015.

A stock market data display from September 25, 2015. By Pavel Bobrovskiy / Shutterstock.com.

Executive Summary

The U.S. stock market, including the S&P 500, Nasdaq Composite, and Dow Jones, has reached all-time highs.

The S&P 500’s Shiller P/E ratio is approximately 40, marking only the third time in history this level has been reached, a valuation that has previously preceded significant market downturns.

Despite the elevated Shiller P/E ratio suggesting an increased likelihood of a market correction, investors are advised to consider diversification and strategic investment approaches rather than panic, acknowledging the market’s historical capacity for long-term recovery.

The Story So Far

The U.S. stock market’s major indexes have recently achieved all-time highs, but this strong performance has pushed the S&P 500’s Shiller P/E ratio to approximately 40. This valuation metric, which smooths out earnings over 10 years, indicates the market is historically expensive, a level previously reached only twice—during the dot-com bubble and in early 2022—both instances preceding significant market downturns.

Why This Matters

The S&P 500’s current all-time highs coincide with a historically elevated Shiller P/E ratio of approximately 40, a level previously associated with significant market downturns, suggesting an increased likelihood of a correction or pullback. This valuation implies that investors, particularly those nearing retirement, should consider diversifying their portfolios and exploring strategic approaches like equal-weight ETFs to mitigate risk, even as the market is expected to demonstrate long-term resilience.

Who Thinks What?

The elevated Shiller P/E ratio (around 40) indicates the S&P 500 is historically expensive, a level that has previously preceded significant market downturns, suggesting an increased likelihood of a market correction or pullback.

Stefon Walters, the article’s author, advises against panic for long-term investors, noting the market’s historical resilience and tendency to recover, and suggests considering diversification and strategic investment approaches.

The S&P 500 index has reached an all-time high this year, alongside the Nasdaq Composite and Dow Jones, but a key valuation metric suggests the market is entering historically expensive territory. As of October 24, 2025, the Shiller price-to-earnings (P/E) ratio for the S&P 500 stands at approximately 40, marking only the third time in history this level has been reached, a phenomenon that has previously preceded significant market downturns.

Market Reaches New Highs Amidst Valuation Concerns

Despite an earlier period of volatility attributed to the Trump administration’s tariff plan, the U.S. stock market’s three major indexes have posted strong gains year-to-date through October 21. The S&P 500 has climbed 14.7%, the Nasdaq Composite is up 19%, and the Dow Jones has risen 10.8%. These advances have brought the indexes to all-time highs.

The Shiller P/E Ratio as a Valuation Indicator

One of the metrics used to assess the S&P 500’s valuation is the Shiller P/E ratio, also known as the Cyclically Adjusted Price-to-Earnings (CAPE) ratio. Unlike the standard P/E ratio, the Shiller P/E uses inflation-adjusted earnings per share averaged over the previous 10 years. This method aims to provide a more stable and balanced view of market valuation, smoothing out temporary economic fluctuations.

Historical Context of High Valuations

The current Shiller P/E ratio of around 40 places the S&P 500 at its third most expensive point in history. The two prior instances when the ratio surpassed 40 were in late 1999, during the dot-com bubble, and in January 2022, amid a bull run fueled by the COVID-19 pandemic. Both periods were followed by significant market corrections; the Nasdaq Composite declined by approximately 78% after the 1999 peak, and the S&P 500 finished 2022 down over 19%.

Outlook and Investor Considerations

Currently, the S&P 500 is trading at a 124% premium compared to its historical average. While past performance does not guarantee future results and short-term market movements are unpredictable, the elevated Shiller P/E ratio suggests an increased likelihood of a market correction or pullback. However, the author of the article, Stefon Walters, advises against panic, noting that the market has historically demonstrated resilience and tends to recover over the long term, with bear markets typically being shorter than bull markets.

For investors nearing retirement, diversifying holdings may be a prudent step to mitigate risk should a correction occur close to when funds are needed. Additionally, for those still looking to invest in the S&P 500, considering an equal-weight S&P 500 exchange-traded fund (ETF) could reduce concentration risk by distributing investments more evenly across all index components, rather than heavily weighting larger technology companies.

Summary of Key Takeaways

The U.S. stock market’s recent all-time highs coincide with the S&P 500 reaching a historically high Shiller P/E ratio of 40, a level previously associated with market downturns. While this valuation suggests an increased potential for a correction, long-term investors are encouraged to consider diversification and strategic investment approaches rather than reacting with panic, acknowledging the market’s historical capacity for recovery.