Stock Market Nudges Upward Amidst Valuation Concerns

The stock market has seen the S&P 500 climb approximately 9% year-to-date and about 28% over the past year, yet a cyclically-adjusted price-to-earnings (CAPE) ratio has reached a level only observed twice before in history: 1929 and 1999 [1]. This valuation signal, which measures the S&P 500's price against the trailing 10-year average of inflation-adjusted earnings, now stands at 40 to 1 [1].

Key takeaways

• The S&P 500 has risen about 9% year-to-date and 28% over the last year [1].
• The CAPE ratio, a valuation gauge, has reached 40 to 1, a level previously seen in 1929 and 1999 [1].
• The VIX, a measure of market volatility, recently fell 4.3% to 20.29, indicating easing tech-driven market anxiety [2].
• Corporate profits grew 9.6% year-over-year in Q4 2025, but prices have grown faster [1].
• Gold prices have surged from $2,000 to over $5,000 an ounce since 2024, attracting new investors [2].

Historical Context of High Valuations

Economist Robert Shiller popularized the CAPE ratio, which currently indicates investors are paying $40 for every dollar of average real earnings over the last decade [1]. The two prior instances when the CAPE ratio touched 40 to 1 were 1929, preceding the Great Depression, and 1999, which came before the dot-com bubble [1]. In 1929, investor euphoria pushed valuations high, leading to a crash that erased wealth and ushered in the Great Depression [1]. Similarly, in 1999, internet companies with no profits were highly valued, and the Nasdaq subsequently lost roughly four-fifths of its value, while the S&P 500 saw little real growth for a decade [1].

Despite this historical pattern, the current market backdrop presents a paradox. The VIX, Wall Street's "fear gauge," sits at 16.76, within its normal range of 15 to 20, suggesting investors are not heavily buying downside protection [1]. However, University of Michigan consumer sentiment registered 49.8 in April, its lowest reading in 12 months and considered recessionary territory [1]. Bond yields are also notable, with the 10-year Treasury yield closing at 4.57% on May 21, placing it in the 98th percentile of its recent range [1]. Corporate profits grew 9.6% year-over-year in Q4 2025, reaching $4,352.1 billion, but prices have increased at a faster rate [1].

Investor Sentiment and Sector Performance

Recent market activity shows a mixed picture. Google's AI advancements have boosted optimism for chipmakers Nvidia and Broadcom, highlighting the growing link between tech giants and semiconductor firms [2]. Nvidia, known for its GPUs essential for AI, and Broadcom, a major semiconductor supplier, both benefited from renewed market interest [2]. Meanwhile, the VIX recently dropped 4.3% to 20.29, signaling a pause in tech-driven market anxiety, partly due to stabilizing U.S. economic data like moderated inflation at 2.4% and a steady labor market [2].