“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Sir John Templeton
If 2025 was a year of stretched valuations, we enter 2026 with the rubber band pulled tighter, not snapped. The S&P 500’s trailing P/E has drifted upward from last year’s 29 to 31, continuing its quiet detachment from historical norms.
To understand the rarity of this air, one only needs to look at the three most famous market ceilings of the last century:
- September 1929: Before the Great Depression, the market’s P/E peaked at roughly 21.6.
- March 2000: At the absolute height of the Dot-Com bubble, it reached 30.7.
- February 2020: Just before the pandemic crash, the ratio sat at roughly 25.0.
Today, we have surpassed all of them. We are no longer just expensive; we have drifted beyond the valuation levels of the Great Depression, the pre-Covid peak, and even the most speculative tech bubble in history.
Optimists often argue that this distortion is contained to a few massive tech giants—the “Magnificent 7″—and that the rest of the market remains reasonably priced. But the data no longer supports that safety net. Even if we strip away those top seven companies, the remaining 493 stocks in the S&P 500 are now trading at a P/E of approximately 23.
This leads to a sobering realization: The “average” stock in today’s market is now more expensive than the entire stock market was at the peak of 1929.
Index investors are effectively paying bubble prices for standard growth. We cannot predict the mechanism of the correction—whether the bill comes due in a sudden crash or through the slow, frustrating erosion of a “lost decade.” But history makes one thing clear: when the starting line is drawn at these valuations, the road ahead is rarely paved with returns.
In this environment, caution isn’t pessimism; it is prudence. When valuations leave no room for error, the most valuable asset in your portfolio is simply patience.
Published 2025/12/31 Market Close
“Seek facts diligently, advice never.”
Philip Carret