Earlier this year, I asked a question: Boom, Bust, or Just a Breather: What’s next for stocks?
Nine months later, the S&P 500 Index has continued to climb, investor confidence has swelled, and valuations are now approaching levels not seen since the dot-com bubble, making this the perfect time to revisit the age-old tension between price and value.
The price/value divide
Warren Buffett put it best: “Price is what you pay. Value is what you get.”
Value is rooted in fundamentals. The lifetime worth of a business boils down to the present value of all the cash it will ever return to shareholders. Sounds simple. In practice? About as easy as nailing Jell-O to the wall. Even Buffett admits that common shortcuts like P/E ratios, book value, or growth rates are just clues to intrinsic value, not the real thing.
Price, on the other hand, is whatever the collective wisdom, or folly, of investors says it is at any given moment. Or as Benjamin Graham reminded us, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
That’s where human psychology complicates things. Value might be math. Price is math plus mood. Greed, panic, FOMO, and FOGI are emotional drivers that can send prices soaring well above value or crashing below it. Eventually, prices tend to “revert to the mean.” But “eventually” is not a timeline you can plug into Excel.
Where we are today
Back in August 2023, the Shiller P/E ratio crossed 30. At the time, I noted that this level had been breached only five times in the prior quarter-century, each eventually followed by a 20%+ decline.
Fast forward to today: the Shiller P/E sits on the cusp of 40, more than double its historical long-term average of 17, and a stone’s throw from its all-time high of 44 at the peak of the dotcom mania in 1999. Simply put, stocks are trading at 40 times 10-year average earnings. That’s not just lofty, it’s nosebleed territory.
Meanwhile, a generation of investors has been conditioned to believe the market only goes up. From the 2009 market bottom through mid-September 2025, the S&P 500 has delivered a compounded annual return of 16%, roughly 50% higher than the long-term average. That is 16+ years since investors have been heavily penalized for excessive risk-taking.
Think about this: anyone younger than about 37—professional money managers and retail investors alike—has never experienced a protracted bear market. “Buy the dip” has been a winning strategy for their entire adult lives. It’s hard to fear gravity when you’ve only known flight.
Maybe things are different this time
Does this mean a crash is imminent? Not necessarily. Sir John Templeton warned, “The four most dangerous words in investing are: this time is different.” And yet, Templeton also admitted that sometimes, about 20% of the time, things are different. That’s the maddening part.
Today’s S&P 500 companies are faster growing, less cyclical, more efficient, have higher margins, and are devouring everything AI-related. Arguably, today’s companies warrant higher P/E ratios than their predecessors. And according to JP Morgan’s Guide to the Markets, if we exclude the top 10 companies, the collective P/E ratio of the remaining 490 companies is appreciably lower.
It’s a plausible case for the ‘this time is different’ worldview.
For me, however, when prices climb far above historical norms, expecting future returns to look like the recent past is wishful thinking. Trees still don’t reach the sky. Gravity still works, even if the fall isn’t steep or doesn’t happen right away.
Thirteen days before the 1929 stock market crash, with the Shiller PE ratio at 30, famed Yale economist Irving Fisher declared that stock prices had reached “what looks like a permanently high plateau.”
The investor strain scale
Geologists don’t just measure earthquakes when they hit. They also track the strain building up along fault lines. The same idea applies to markets.
If we borrowed that language for investing, today’s market feels like it’s sitting somewhere in the middle of an “investor strain scale.” Not calm and quiet at zero, but not yet at the catastrophic extremes either. More like a 6 or 7: noticeable pressure and rising tension beneath the surface.
And while we can’t predict when the release will come, history suggests the longer the strain builds, the more forceful the eventual outcome.
That’s the frustrating part about heightened market valuation: it raises the risk of a shock but doesn’t put a date on the calendar. This month’s reading of 40 on the Shiller P/E tells us the tectonic pressure is likely building. What we don’t know is when or how violently it will release.
For reference, if the Shiller PE ratio were to drop back to the level of 28 (roughly the average for the last 30 years), about $16 trillion of S&P 500 market capitalization could evaporate from today’s ~$55 trillion.
What to do when you don’t know what to do?
The euphoric high of a bull market, just like sex, feels best right before it ends. So how should long-term investors respond to today’s arguably frothy setup? With strategy, not panic. A calm mind makes better decisions.
If anything, consider tactical adjustments to your portfolio, not wholesale changes:
Dial back exposure to the riskiest or most aggressive positions.
Add a little ballast with defensive holdings.
Most importantly, stick to your financial plan. It’s built to withstand shocks, not time them perfectly.
The point isn’t to predict a crash or definitively conclude that ‘this time is different.’ It’s to recognize when the ground is rumbling and act with prudence, not emotion.
Final thought
Right now, the market’s price looks stretched relative to its value, and the strain beneath the surface is building.
You don’t need to know the exact day the fault line shifts, only that your plan is built to weather the shock when it eventually arrives.
As always, invest often and wisely. Thank you for reading.
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Originally published at www.CosmoDeStefano.com