After three consecutive years of double-digit returns, only the eighth since 1926, the leading stock market index, S&P 500(SNPINDEX: ^GSPC)2026 is off to a slow start. As of March 11, the index was down nearly 1% year-to-date.
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Even so, the S&P 500 is still historically expensive when looking at the Shiller price-to-earnings (P/E) ratio, also known as the CAPE ratio, which refers to cyclically adjusted price-to-earnings.
The Shiller P/E ratio looks at the earnings of the S&P 500 over the past 10 years, adjusting for inflation to prevent one-time events from skewing the numbers. As of this writing, Shiller’s P/E is at 39.2, near its highest level since the mid-2000s.
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The last time the S&P 500 was this expensive was at the height of the dot-com bubble. In November 1999, Shiller’s P/E ratio reached approximately 44.2. From then until the end of the dot-com bubble in October 2022, the S&P 500 fell about 40%.
In October 2021, Shiller’s P/E ratio reached 38.5. From there until the S&P 500 bottomed out in October 2022, the index fell more than 20%.
So, historically, an S&P 500 this expensive isn’t a reason to jump for joy. However, I cannot stress enough that just because it happened in the past does not mean it will happen again. Although it is historically expensive, the situation with the S&P 500 today is not what we saw in the dot-com bubble or the bear market of 2022.
The dot-com bubble was inflated by wild speculation and companies without real earnings to justify their valuations, and 2022 was a time of cheap money and ultra-low interest rates that caused many investors to lose sight of potential risks.
Today, the bull market is largely fueled by the current artificial intelligence boom and a handful of megacap tech companies. It doesn’t make it better – just different.
My advice would be to use the dollar cost averaging approach to investing right now – or anytime, for that matter. When you spend dollar averaging, you put yourself on an investment schedule and stick with it no matter what. You can invest every Monday, every last Friday of the month, every time you get paid, or whatever makes sense for your situation.
It doesn’t matter if prices are high, low or stagnant; Your goal should be to consider your usual investments. By dollar cost averaging, you protect yourself from investing a few bucks before a sudden decline or reversal in the S&P 500. It’s not a foolproof method, but it helps.
But even if the S&P 500 experiences a major decline or enters a bear market, there is one positive that investors should hold on to: Every time the S&P 500 has done so, it has rebounded and produced long-term results. Whether it’s Black Monday (1987), the dot-com bubble (1999), the financial crisis (2008), or the bear market of 2022, the S&P 500 has bounced back.
Again, past performance does not guarantee future success, but it is one of the safest bets you can make in the stock market.
If you’re concerned about how expensive and concentrated the current S&P 500 is, an alternative is to invest in an equal-weight S&P 500 ETF, such as Invesco S&P 500 Equal Weight ETF.
Instead of being weighted by market cap, which has led to the high concentration of megacap tech stocks, the regular savings plan spreads its weighting evenly among all S&P 500 companies. This gives you the benefit of investing in S&P 500 stocks without relying heavily on companies like those that make up the “Magnificent Seven.”
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Stephon Walters has no position in any of the listed stocks. The Motley Fool has no position in the stocks mentioned. Motley Fool has a disclosure policy.
This is the most expensive stock market in 25 years. Should investors be worried? Originally published by Motley Fool
