Did you know the S&P 500 has experienced about 38 market corrections since the 1950s, and has historically averaged roughly 10% in annual returns since 1957 (1)(2)? While the market has faced plenty of bumps, it has often rewarded investors who stayed invested over time.
Every few months, headlines warn that stocks are “too expensive” or “ready to fall.” Sound familiar? These warnings have appeared for decades. Yet many long-term investors who remained invested have historically come out ahead.
So when markets feel “too high,” should you pull back, or keep going? Let’s look at what history can teach us, one quarter at a time.
Looking Back: What History Teaches Us
Markets often fluctuate sharply before rebounding, reminding investors that volatility is a normal part of long-term investing.
The price-to-earnings (P/E) ratio is one of the most common ways to measure whether stocks appear “expensive.” It compares a company’s stock price to its earnings per share, showing how much investors are willing to pay for each dollar of profit.
According to Morningstar, “For the S&P 500 SPX, the ratio rose as high as 38.11 in November, its highest level since late 2021” (3). That means investors were paying nearly 38 times companies’ earnings, a level not seen in years. While some viewed this as a warning sign, markets continued to move quarter by quarter, illustrating how valuations can swing widely before settling into longer-term trends.
Historically, markets have stretched, dipped, and often recovered over time. When viewed quarter by quarter—not day by day—a general trend appears: growth often takes time, but it can add up.
Putting Valuations in Perspective
When people say the market is “overvalued,” they usually mean prices are high compared to company profits. But that doesn’t necessarily mean trouble is ahead.
- High P/E ratios: A high ratio can suggest that investors expect companies to grow. The U.S. stock market often trades above its long-term average, but over time, earnings may catch up (4).
- Earnings and innovation: Companies tend to find ways to grow even through slowdowns. They adapt, innovate, and may recover faster than expected (4).
- Diversification helps: Mixing investments such as stocks, bonds, and cash can help manage risk and make downturns easier to navigate (5).
Why Staying the Course Can Help
The phrase “buy low, sell high” sounds simple, but in practice, many investors do the opposite. When the market rises, people rush in; when it falls, they rush out.
Research shows that the average investor often earns less than the market itself—largely because of emotional decisions (6). Checking your financial strategy once a quarter instead of every day can help you stay focused on the long term and avoid short-term reactions.
The goal isn’t to predict the market. It’s to remain invested in a way that may allow time and compounding to work in your favor.
The Big Picture
No one knows how long high valuations will last. But history shows a consistent pattern: markets have recovered from past downturns, though timing and results vary.
So maybe the better question isn’t, “Are stocks too expensive?” but “Am I invested in a way that helps me stay invested?”
Because staying the course doesn’t mean ignoring risk, it means having a financial strategy designed to help keep you steady through market noise.
Think in Quarters, Not Headlines
High valuations can make investors uneasy, but they’re nothing new. The market’s story has generally been one of patience, not prediction.
As you review your financial approach this quarter, ask yourself: Am I reacting to headlines, or following a disciplined strategy?
If you’d like to see how your financial approach aligns with today’s market environment, consider scheduling a complimentary meeting with us to explore ways to help you stay on track.
Sources:
(1) Kiplinger. “Historical Stock Market Patterns for Investors to Know.” Kiplinger, 2024. https://www.kiplinger.com/investing/historical-stock-market-patterns-for-investors-to-know
(2) Investopedia. “What Is the Average Annual Return of the S&P 500?” Investopedia, updated 2024. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
(3) Morningstar. “Yes, Stocks Are Crazy Expensive Right Now.” Morningstar, November 16, 2024. https://www.morningstar.com/news/marketwatch/20241116213
(4) Morningstar. “U.S. Stock Market Outlook: Priced for Perfection.” Morningstar, 2024. https://www.morningstar.com/markets/us-stock-market-outlook-priced-perfection-time-buy
(5) Kiplinger. “How to Build a Diversified Portfolio.” Kiplinger, 2024. https://www.kiplinger.com/investing/how-to-build-a-diversified-portfolio
(6) Investopedia. “Why Market Timing Doesn’t Work.” Investopedia, updated 2024. https://www.investopedia.com/articles/stocks/06/markettiming.asp
Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Diversification and asset allocation do not ensure a profit or protect against loss in declining markets. Indices are unmanaged and cannot be invested in directly.
