By Teresa Rivas
Today is my birthday, and I'm feeling a bit over the hill. But at least I'm not 146.
That's how many years one can look back in time and see that stocks' current valuations are sky-high. That doesn't mean, however, investors should take profits or run for the exits just yet.
Apollo Chief Economist Torsten Sløk examined stock prices going back to 1880 using a metric that gauges valuations over the long term while smoothing out business cycle volatility.
The Shiller cyclically adjusted price-to-earnings $(CAPE)$ ratio is a valuation measure that divides a stock's current price by the average of the last 10 years' inflation-adjusted earnings. This tactic is a better way to assess sustainable earnings power than the typical price-to-earnings ratio, since that only takes one year into account, he wrote in a Friday note.
"The latest reading shows that equity valuations are near the highest levels since 1880," Slok writes.
The S&P 500's current Shiller CAPE ratio is at roughly 40 times. The only time it has been higher in nearly 150 years is around the turn of the 21st century, which is the era of the dot-com stock crash. Before that, it peaked at just over 30 times just before 1930. Neither of those were great times to be buying stocks, to put it mildly.
Other metrics suggest the market could be headed for a pullback or worse. Plenty of analysts have pointed out that this bull market is getting long in the tooth. There is little precedent for four straight years of double-digit S&P 500 returns, even if many strategists are predicting that 2026 will lead to just that.
There are also only four years left in the decade -- which matters when looking at historical odds of recession, DataTrek co-founder Nicholas Colas says.
"Odds of a recession sometime in the next four years is roughly 60 percent, using the historically-based probability of 20 percent/year and assuming independence across years," he notes on Friday.
History also shows that the odds of a volatility shock before the end of the decade, even if it lasts just one day, is 85%.
Yet stocks can recover from such shocks, especially if they are short in duration. Another difference now is the market has the transformative power of artificial intelligence on its side. Moreover, the S&P 500's profits are likely to be much higher by 2030. The index's earnings have increased over a 48-month window 85% percent of the time , at an average rate of 37% over any four-year period since 1990.
To bring it back to valuation, absent a recession, the S&P 500 can finish the decade up 37% from where it is today, even without any further multiple expansion, Colas's research shows. That comes out to an annual compounded growth rate of 8% a year for the next four years, right in line with historical averages. (Trivariate Research predicts average returns will also get the S&P 500 to 10,000 by 2030.)
All of that put together makes Colas confident that there are more gains ahead, even if the market is pricey and faces turbulent times.
"It is the duration of a shock, not its magnitude, that structurally depresses valuations," he says. "Put another way, PE multiples are shorthand measures of investor confidence in future earnings power, built on a bedrock of predictably supportive government policy."
In other words, if earnings can hold up, stock gains can continue, making the market's already high valuations less onerous.
The "but" here is the need for predictable government support.
"The period from 2000 to 2010 is the cautionary tale here," Colas says of the period when the S&P 500's annualized returns were negative and it ended the decade below where it began. "This wouldn't have been a lost decade for the S&P 500 if Congress had taken the Global Financial Crisis more seriously in 2008 and/or addressed the Great Recession adequately in 2009."
Of course that is a wild card, given how unpredictable policy has been under the current administration, but it hasn't bothered the market -- so far.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 16, 2026 13:57 ET (18:57 GMT)
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