S&P 500 Valuations Hit Historic Extremes: Shiller PE Tops 40 for Only Second Time in 155 Years

For only the second time since Robert Shiller began tracking cyclically-adjusted stock valuations in 1871, the S&P 500's Shiller PE ratio has crossed above 40. The milestone, reached as the index touched all-time highs early in 2026, places current market valuations on par with the most extreme levels in American financial history—the peak of the dot-com bubble in 1999-2000.

The Shiller PE, also known as the cyclically-adjusted price-to-earnings ratio (CAPE), smooths out earnings fluctuations by comparing current prices to average inflation-adjusted earnings over the prior 10 years. At 40.22 as of January 1, 2026, the metric stands more than double its historical median of 16.04 and well above the level of 25 that Shiller himself has characterized as "concerning."

A Once-in-a-Century Reading

To grasp the significance of a Shiller PE above 40, consider what hasn't been enough to get there. The roaring twenties before the 1929 crash peaked at 32.6. The go-go years of the late 1960s topped out at 24.1. Even the 2021 post-pandemic euphoria reached only 38.6 before retreating.

Only the dot-com bubble—when investors convinced themselves that traditional valuation metrics didn't apply to the new economy—pushed the ratio above 40. It peaked at 44.2 in December 1999 before the Nasdaq crashed 78% over the following 30 months.

"When valuations reach extreme levels, the market becomes vulnerable to disappointment. It doesn't mean a crash is imminent, but it does mean the margin for error has shrunk dramatically."

— Professor Robert Shiller, Yale University

Historical Shiller PE extremes for context:

• Current reading (Jan 2026): 40.22
• Dot-com peak (Dec 1999): 44.2
• 2021 pandemic high: 38.6
• 1929 pre-crash peak: 32.6
• Historical median: 16.04
• Historical low (1920): 4.78

What Extreme Valuations Tell Us

High Shiller PE readings have historically been associated with lower subsequent long-term returns, though the relationship is far from mechanical. When the ratio has exceeded 25, subsequent 10-year annual returns have averaged just 4%—compared to over 10% when starting from below the median.

However, valuations tell us little about short-term market direction. The dot-com bubble saw the Shiller PE exceed 30 in 1997 and continue rising for nearly three more years before the ultimate peak. Markets can remain expensive longer than skeptics can remain solvent.

Factors that might justify elevated valuations:

• Lower interest rates: Rates remain below historical averages, supporting higher multiples
• Technology productivity: AI may genuinely be driving a step-change in corporate profitability
• Index composition: Today's S&P 500 is dominated by high-margin technology companies
• Globalization benefits: U.S. multinationals profit from worldwide markets
• Buybacks: Share repurchases have concentrated earnings per share growth

The AI Premium

Much of the market's current valuation premium reflects expectations for artificial intelligence to transform corporate profits. The "Magnificent Seven" technology stocks—Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla—trade at significant premiums to the broader market, and their weighting in the S&P 500 means their valuations disproportionately affect the index's aggregate metrics.

If AI delivers on its transformative promise, current valuations may prove justified in hindsight. If the technology disappoints or benefits accrue more slowly than expected, the premium could evaporate quickly.

The challenge for investors is that neither outcome is certain. AI is genuinely revolutionary in its capabilities, but revolutionary technologies don't always generate revolutionary investment returns. The railroad, automobile, and internet all transformed society while producing mixed results for investors who bought at peak enthusiasm.

International Alternatives

For valuation-conscious investors, the Shiller PE disparity between U.S. and international markets presents an interesting opportunity. European and emerging market indices trade at substantial discounts to the S&P 500, potentially offering better long-term return prospects for those willing to diversify geographically.

Current Shiller PE by region (approximate):

• United States: 40+
• Developed Europe: 18-20
• Japan: 22-24
• Emerging Markets: 14-16

The valuation gap doesn't guarantee international outperformance—the U.S. has commanded a premium for much of the past decade for good reason. But it does suggest that investors concentrated entirely in U.S. stocks are accepting more valuation risk than those with broader geographic exposure.

What This Means for Your Portfolio

Extreme valuations don't require extreme portfolio changes. Markets can stay expensive for years, and missing continued upside can be just as costly as suffering a correction. However, the current environment does warrant heightened attention to risk management:

1. Diversify Thoughtfully: Consider whether your portfolio is appropriately diversified across geographies, sectors, and asset classes. Concentration in expensive U.S. large-caps may have worked brilliantly for years, but diversification reduces risk when valuations eventually normalize.

2. Maintain Your Discipline: If you have a systematic investment plan, stick with it. Trying to time the market based on valuations has historically been a loser's game. Regular investing through dollar-cost averaging helps manage entry-point risk.

3. Build Cash Buffers: High valuations increase the importance of having liquidity for both emergencies and opportunities. If markets do correct significantly, cash allows you to rebalance or add to positions at better prices.

4. Stress-Test Your Plans: Run scenarios assuming a 20-30% market decline. Would your financial plans survive? Could you avoid selling at the bottom? If not, your portfolio may be taking more risk than appropriate for your situation.

The Bottom Line

Crossing the Shiller PE threshold of 40 doesn't mean a crash is imminent. Markets can remain irrational longer than anyone expects, and structural changes may partly justify today's elevated valuations. However, the milestone does serve as a reminder that stock prices have outrun fundamentals at a pace seen only once in the past 155 years.

For patient investors with long time horizons, periods of high valuations are simply part of the market cycle. For those nearing major financial transitions—retirement, college funding, home purchases—the message is clearer: now is a time for prudence rather than aggressive risk-taking. The market will provide opportunities again; ensuring you're in a position to capitalize on them is the essence of sound financial planning.