“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
Peter Lynch

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In September 2000, the S&P 500 traded at a lofty trailing P/E of 25.6—a frothy peak that preceded 11 years of near-zero returns, even with dividends reinvested. As of January 31, 2025, the S&P 500’s trailing P/E has climbed to 29, eerily reminiscent of that overheated moment and a far cry from its long-term average of 16. Sure, the index might defy gravity for a while longer, continuing its upward sprint before reverting to historical norms. But banking on that feels more like wishful thinking than wisdom. The S&P has long been a reliable engine for the “know-nothing” investor seeking steady, long-term compounding—yet at a P/E of 29, it’s a gamble I wouldn’t take. History whispers a warning: when valuations stretch this thin, the prudent move isn’t to pile in, but to step back.

Published 2025/03/18

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“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”
Seth Klarman