HOW EXPENSIVE IS THE MARKET?
Three ways to answer the same question.
No single number captures "market valuation" perfectly. This page shows the three most-cited long-horizon measures side by side: the classic trailing PE, Robert Shiller's cyclically-adjusted CAPE, and the market-cap-to-GDP Buffett Indicator. Each looks at a different denominator; together they triangulate. All three currently read historically expensive.
Where we stand today
1. Trailing PE — 1871 through today
Monthly readings, connected. The dashed cyan line is the long-term average. The green band below the average marks the "cheap" zone; the red band above marks the "expensive" zone.
Chart y-axis is capped at 50 for readability. The 2009 spike to ~124 is a well-known artifact of the GFC earnings collapse (denominator near zero), not a real "market at 124x earnings" moment.
What happens next when the PE is extreme?
For every month with 12 months of data ahead of it, we recorded the S&P 500's real total return (dividends reinvested, inflation-adjusted) over the next 1 year and next 5 years. Then we bucketed those months by PE ratio. The result is a plain-English answer to: "when the PE was this, the market went on to do this."
2. Shiller CAPE — cyclically-adjusted PE
Divides today's price by the 10-year average of real (inflation-adjusted) earnings. Smoothing over a full business cycle removes the noise that makes trailing PE spike during earnings collapses (2009) or crash during earnings booms. Historically CAPE tops out near 44 (Dec 1999 dot-com peak) and bottoms near 5 (1921). Robert Shiller's canonical long-run valuation measure.
3. Buffett Indicator — US market cap / GDP
Warren Buffett called this "probably the best single measure of where valuations stand at any given moment" (Fortune, 2001). It's total US corporate equity divided by GDP — a rough answer to "how big are stocks vs. the actual economy?" Modern readings run structurally higher than in Buffett's era (different interest-rate, tax, and globalization regime) but the shape still shows extremes clearly.
Buffett's original bands (2001): <70% cheap · 70–90% attractive · 90–115% reasonable · 115–135% expensive · 135%+ danger zone. Post-2013 readings have lived above 135% almost continuously.
What the data actually says
Cheap markets pay you.
When the PE ratio dropped below 10, forward 5-year real returns averaged roughly +13% per year. Those readings happened in 1917–1920, the 1930s recovery, 1948–1954, 1974–1982, and briefly in 2009. All were terrifying times to buy — and all of them rewarded buyers handsomely.
Takeaway: The single most consistent pattern in 155 years of stock-market history is that low starting valuations produce high forward returns.
Expensive markets punish you.
When the PE has been above 30 (excluding the 2009 GFC data artifact), forward 5-year real returns have averaged only +1.5% per year and were positive just 43% of the time. This zone captures 1929, 1998–2001, and 2021–today. Compare that to Very Cheap (PE below 10), which delivered +12.4% real annualized with a 92% hit rate.
Takeaway: A high PE doesn't tell you when stocks will fall. It just says the multi-year return that follows is likely to be well below the long-term average — sometimes zero.
PE is a horrible short-term timing tool.
The 12-month forward return is barely correlated with the current PE. A high PE can go higher for years (1997–2000 saw PE climb from 30 to 40+ while stocks doubled). Valuation matters over years, not months.
Takeaway: Don't sell everything because the PE is high. Use it to size your expectations for the next decade, not to time the next quarter.
Methodology & data sources
PE ratio series: Robert Shiller's monthly dataset (Yale) for the historical baseline, extended through the present via multpl.com, which republishes the same series with a monthly refresh.
The PE ratio here is the classic trailing 12-month P/E — index price divided by the sum of the previous four quarters of reported earnings. This is not the Shiller CAPE (10-year cyclically-adjusted PE), which smooths earnings across a full business cycle and typically reads higher.
Forward-return computation: uses Shiller's "Real Total Return Price" series — S&P 500 price with dividends reinvested, adjusted for CPI inflation. Returns shown are annualized real returns, so they're directly comparable across decades regardless of the inflation regime.
Refresh: the current-month PE reading refreshes daily via our GitHub Actions workflow. Real Total Return Price is a stable historical series that only extends as Shiller publishes new numbers (typically once a year).
The 2009 anomaly: the trailing PE hit ~124 in mid-2009 not because stocks were bubblicious but because reported earnings crashed to nearly zero during the financial crisis. The ratio spiked; the expensiveness did not. This is a well-known artifact and why some analysts prefer CAPE.
Shiller CAPE series: same Robert Shiller dataset, refreshed monthly via multpl.com. CAPE = current real price / 10-year average of real earnings.
Buffett Indicator series: computed from two FRED series — NCBEILQ027S (Fed Z.1 Nonfinancial Corporate Business, Corporate Equities as a Liability, in millions of USD) divided by GDP (nominal, seasonally adjusted, in billions of USD), expressed as a percentage. The classic version used the Wilshire 5000 Total Market Full Cap Index as the numerator; FRED retired that series when Nasdaq took over the Wilshire index, so we use the Fed Z.1 nonfinancial-corporate-equity figure that current Buffett Indicator dashboards (longtermtrends, gurufocus post-2023) also use. Slightly narrower scope than the original (excludes financials), but the shape of the series and its interpretation are the same.
Reminder: None of this is investment advice. Historical valuation patterns are not guarantees. The market has stayed expensive for many years at a time. Always do your own research or talk to a financial professional.