Finance

Is the Shiller P/E Ratio Flashing a Warning? What Investors Need to Know About Record Highs

Stock indexes hit record highs, but the Shiller P/E Ratio signals potential downturns, despite long-term market resilience.

byAndres Castro

October 26, 2025, 11:36 AM

A trader's hands hold a tablet showing a stock chart, with monitors in the background.

A trader analyzes a stock market chart on a tablet in the office. By BAZA Production / Shutterstock.com.

Executive Summary

Major U.S. stock indexes have reached new record highs, pushing the Shiller Price-to-Earnings (P/E) Ratio to its second-highest point since 1871, signaling potential market trouble.

Historically, a sustained Shiller P/E Ratio above 30 has consistently preceded significant market corrections or bear markets, as observed before the Great Depression, the dot-com bubble burst, and recent downturns in 2020 and 2022.

Despite current high valuations, long-term historical data indicates market resilience, with all 20-year periods for the S&P 500 generating positive returns and bull markets significantly outlasting bear markets.

The Story So Far

Major U.S. stock indexes have recently reached new record highs, following a six-month rally that occurred after President Donald Trump introduced new tariff and trade policies in early April 2025. This surge has pushed market valuations to historically high levels, with the widely used Shiller Price-to-Earnings (P/E) Ratio now at its second-highest point since 1871, a level that has consistently preceded significant market corrections or bear markets in the past.

Why This Matters

The U.S. stock market’s current record highs and the Shiller P/E Ratio reaching its second-highest level since 1871 signal a significant near-term risk of a market correction or bear market, aligning with historical patterns where such premium valuations proved unsustainable. Nevertheless, long-term investors can draw optimism from historical data demonstrating that multi-decade investment horizons consistently yield positive returns, as bull markets typically endure much longer than downturns.

Who Thinks What?

Sean Williams’ analysis, supported by the Shiller P/E Ratio, indicates that current market valuations are at historically high levels, second only to the dot-com bubble, which historically precedes significant market corrections or bear markets.

Conversely, research from Crestmont Research and Bespoke Investment Group suggests long-term optimism, highlighting that all 20-year periods for the S&P 500 have yielded positive returns, and bull markets historically last significantly longer than bear markets.

Major U.S. stock indexes, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, have recently reached new record highs, pushing market valuations to levels historically associated with significant downturns. An analysis by Sean Williams on October 26, 2025, highlights that the widely used Shiller Price-to-Earnings (P/E) Ratio has surged to its second-highest point since 1871, signaling potential trouble ahead for investors, even as historical data suggests long-term market resilience.

Market Reaches Uncharted Territory

Following a period of volatility in early April 2025, which occurred after President Donald Trump introduced new tariff and trade policies, the S&P 500, Dow Jones, and Nasdaq Composite have experienced a six-month rally. This surge has propelled all three benchmarks into uncharted territory, marking multiple record-closing highs within the year.

The Shiller P/E Ratio Signals Caution

A key indicator for broader market valuation, the Shiller P/E Ratio—also known as the cyclically adjusted P/E (CAPE) Ratio—has reached a peak of 40.33 during the current bull market. This valuation tool, which averages inflation-adjusted earnings per share over the past decade, has an average multiple of 17.29 since its back-testing to January 1871.

The current reading represents the second-highest multiple observed during a continuous bull market in 154 years. Historically, the Shiller P/E surpassing and holding above 30 for at least two months has preceded substantial market corrections or bear markets.

Historical Precedents of Elevated Valuations

There have been five prior instances since 1871 where the Shiller P/E exceeded the 30 threshold for a sustained period, each ultimately leading to significant market declines. These include the period before the Great Depression in 1929, the dot-com bubble burst from 1997 to 2001, and the sell-off in late 2018.

More recently, the CAPE Ratio surpassed 30 just before the COVID-19 crash in early 2020 and again prior to the 2022 bear market. These historical patterns suggest that premium valuations are not sustainable over extended periods, according to the analysis.

Long-Term Optimism Persists

Despite these near-term warnings, historical data offers a counter-narrative for long-term investors. Research from Crestmont Research, analyzing rolling 20-year total returns for the S&P 500 dating back to 1900, indicates that all 106 unique 20-year periods have generated a positive annualized total return.

This suggests that investors who maintained their positions for two decades, even through various economic downturns, wars, and pandemics, ultimately saw their investments grow.

Market Cycles Favor Bullish Trends

Further supporting long-term optimism, data compiled by Bespoke Investment Group on S&P 500 market cycles since the Great Depression reveals a significant disparity between bull and bear market durations. The average S&P 500 bear market has lasted approximately 286 calendar days, or about 9.5 months.

In contrast, the typical S&P 500 bull market has endured for an average of 1,011 calendar days. This pattern underscores that while downturns can be emotionally challenging, they are generally shorter-lived than periods of market expansion.

Navigating Market Valuations

While current stock valuations, particularly the elevated Shiller P/E Ratio, signal a potential for future market volatility and corrections, history consistently demonstrates the long-term wealth-creating power of stocks. Investors are advised to consider the disproportionate nature of market cycles, where extended periods of growth often outweigh shorter downturns.