The financial landscape is witnessing a renewed focus on equity valuations as analysts observe fluctuating price-to-earnings (P/E) ratios across major indices. For comparison, the Nasdaq 100 today has a P/E ratio of about 34. At the same time, the normalized S&P 500 has reverted back to around 29. This is a huge departure from the 41 we saw in 2021 during the peak of the tech bubble. This transition has led many to wonder if the recent boom in technology equities is sustainable.
The Cyclically Adjusted Price-to-Earnings Ratio (CAPE Ratio), a key gauge in long-term value investing that takes into account the business cycle, is at 40. This figure is much larger than the CAPE ratio at the peak of the 2021 bubble burst. It almost hits the record of 44 set during the dotcom boom in 1999. This trend is indicative of over-inflated market valuations, similar to previous speculative boom-times.
Current Valuation Metrics
As the P/E ratios of both the Nasdaq 100 and S&P 500 indicate, technology appears to be overvalued. The Nasdaq’s P/E of roughly 34 is a reflection of a premium that’s exactly what investors are willing to pay for future expected earnings growth. On the other hand, the S&P 500’s price-to-earnings ratio of 29 still indicates that expectations are high across the broad market.
As for how alarming these figures are, analysts note they are nearly on par with early 2025 numbers. Taken together, this trend could indicate market growth is beginning to level off. The potential for volatility and whether these valuations can be sustained as they exceed historical averages are worrying.
So investors will need to watch these indicators like a hawk. The CAPE ratio, in particular, provides a long-term view by using a 10-year average of inflation-adjusted earnings. At present CAPE levels of 40, investors should wonder what future earnings can possibly make up for these very high valuations.
Expert Insights on Market Trends
Here’s what Joe Davis, Vanguard’s global chief economist, has to say about the bubble or lack thereof in today’s U.S. tech stocks. These are his reasons…” The bubble in expectations for U.S. tech stocks are destined to disappoint on at least two counts. Should earnings expectations be this high. Coupled with the usual underestimate of creative destruction through new entrants in the field which undercuts aggregate profitability. Volatility in this sector—and therefore the U.S. stock market overall—is bound to spike.
Davis’s assessment highlights a critical factor in evaluating tech stocks — the potential for disruption by new competitors that could diminish existing firms’ profitability. As markets continue to process all of these dynamics, volatility is likely to spike, which will only make investment decisions more complicated.
Comparisons to Historical Trends
Today’s valuation measures and investor mood reflect an environment similar to past market cycles. Current P/E ratios are at their highest averages in 35 years. They ring familiar to those who remember those speculative investment periods, most notably the tech bubble of 2021 and the dotcom boom in the late 1990s.
Historically, these are the kinds of unreasonably high valuations that usually come crashing down when investors have a moment of re-evaluation. In many ways, especially from a policy perspective, markets look very much like last year’s battleground. Needless to say, analysts are calling for investors to adjust their approaches for greater success.
Vanguard is very optimistic about value and international stocks over the coming five to ten years. They don’t think growth stocks won’t have as much success moving forward, but that there are more dynamic prospects in other pockets of the market.