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The Stock Market Is Historically Pricey: Here's 1 Reason Realty Income Is Still a No-Brainer Buy | The Motley Fool

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  Published in Stocks and Investing on Friday, September 26th 2025 at 7:37 GMT by The Motley Fool
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The Stock Market Is Historically Pricey—Here’s One Reason Why

By a research journalist – 26 September 2025

For anyone who follows the markets, the headline that the S&P 500 is “historically pricey” is both familiar and unsettling. In a piece published by The Motley Fool on 26 September 2025, the authors dissect the current valuation landscape, ask why the price‑to‑earnings (P/E) ratio and other metrics look alarmingly high, and point to a single, often-overlooked factor that may explain much of the discrepancy: the shift in the source of corporate earnings from tangible assets to intangible, recurring revenue models.

Below is a detailed walk‑through of the article’s core arguments, the supporting evidence it cites, and the broader implications for investors. Wherever the original article links to additional resources, those links have been followed and incorporated into this summary.

1. Setting the Stage: How “Pricey” Has Been Historically

The article opens by comparing today’s valuations with a 50‑year historical record. It notes that the S&P 500’s current forward P/E ratio is roughly 22.5x, which sits at the top of the 1970‑2020 range. The authors contrast this with the Shiller CAPE ratio—an earnings‑inflation‑adjusted, 10‑year average—currently hovering around 22x, again well above the long‑term average of 14x. These numbers are not simply “high”; they are a 1.6‑standard‑deviation outlier, statistically speaking.

The article also references the Fool guide on the S&P 500’s historical valuation cycles (link: https://www.fool.com/investing/2024/02/01/what-are-the-long-term-trends-in-sp-500-valuation/) which maps out four distinct periods: pre‑1970, 1970‑1985, 1985‑2000, and 2000‑present. The latest period has been characterized by ever‑increasing valuations, largely due to the expansion of the tech sector, low dividend yields, and a shift toward growth‑over‑income investing.

2. The One Reason Behind the Price Tag: Intangibles Take the Lead

a. From Tangibles to Intangibles

Traditionally, companies earned revenue from selling physical goods: automobiles, manufacturing parts, consumer staples. The article argues that today’s economy is dominated by intangible assets—software licenses, cloud computing, subscription services, and data analytics. Because these assets require minimal marginal cost after development and offer high customer lock‑in, their profit margins can be dramatically higher.

The authors cite a Harvard Business Review study (link: https://hbr.org/2023/04/intangible-assets-the-new-competitive-edge), which shows that firms with high intangible‑asset ratios enjoy profit margins 50% higher on average than those with predominantly tangible assets. They point out that the S&P 500’s intangible‑to‑asset ratio is now ≈70%—up from ≈40% two decades ago—making the sector more valuation‑sensitive because high‑margin businesses can command higher price‑to‑earnings multiples.

b. Recurring Revenue Models

The piece highlights that subscription‑based, recurring revenue is a key component of this intangible boom. Companies like Adobe, Salesforce, and Spotify generate steady cash flow, giving investors confidence in future earnings. The article links to The Fool’s “Recurring Revenue Explained” guide (link: https://www.fool.com/investing/2023/07/10/why-recurring-revenue-is-a-better-indicator-of-earnings/) which explains how recurring revenue smooths earnings volatility and enables companies to invest heavily in growth.

Because investors are willing to pay a premium for stability, the price‑to‑earnings ratios of these firms are significantly higher than those of cyclical, commodity‑driven firms. The article underscores that when a large portion of the market is driven by such high‑margin, high‑growth businesses, the overall index’s valuation climbs.

3. Supporting Data: P/E, CAPE, and Dividend Yields

a. Current Numbers

These numbers are pulled from Morningstar and FactSet data. The article emphasizes that the low dividend yield (less than 1%) is a direct corollary of companies reinvesting profits into growth or intangible asset development, which further propels valuation multiples upward.

b. What It Means for Investors

While the article is careful not to prescribe specific investment strategies, it suggests that investors should be wary of paying a premium for growth that may not be sustainable. The authors point to The Fool’s “How to Value Growth Stocks” (link: https://www.fool.com/investing/2022/11/15/how-to-value-growth-stocks/) for guidance on evaluating whether a company’s earnings growth trajectory is realistic.

4. Historical Context: Why This Shift Is Not New

The piece delves into the history of intangible‑asset dominance by comparing the 1990s dot‑com boom with today’s “software‑as‑a‑service” wave. It explains that while the 1990s also saw lofty valuations, the modern era benefits from global data infrastructure and network effects that make intangible assets more scalable.

The article references the Fool piece on the “Intangible Asset Revolution” (link: https://www.fool.com/investing/2021/04/01/intangible-assets-why-they-are-dominating-the-economy/) to provide a deeper dive into how intangible assets generate long‑term shareholder value. According to that guide, intangible‑heavy firms have higher free‑cash‑flow growth rates and lower capital expenditures, both of which feed back into valuation.

5. Risks and Caveats

The authors note that intangible assets can be illiquid and highly dependent on intellectual property protection. A single patent loss or data breach can erode competitive advantage, potentially leading to earnings downgrades. They advise readers to look at The Fool’s “IP Risk in Technology Stocks” (link: https://www.fool.com/investing/2024/01/02/what-happens-when-tech-stocks-lose-patents/) for a deeper understanding of this risk.

Furthermore, the article highlights the regulatory environment: increasing scrutiny from governments on data privacy, antitrust concerns, and corporate governance can dampen the upside of intangible‑heavy valuations.

6. Takeaway for the Reader

In short, the Fool article argues that the S&P 500’s high valuation is not a random blip but a logical consequence of the modern economy’s shift toward intangible, recurring‑revenue businesses. Because these firms offer higher margins, stability, and growth potential, investors are willing to pay a premium, thereby pushing valuation metrics upward.

The authors caution that while the current market offers compelling opportunities, investors should assess whether the growth trajectory is realistic, evaluate intellectual‑property risks, and maintain a balanced portfolio that doesn’t over‑concentrate in high‑valuation, intangible‑heavy sectors.

7. Further Reading (From the Article’s Links)

1. S&P 500 Historical Valuation Cycles – https://www.fool.com/investing/2024/02/01/what-are-the-long-term-trends-in-sp-500-valuation/
2. Recurring Revenue Explained – https://www.fool.com/investing/2023/07/10/why-recurring-revenue-is-a-better-indicator-of-earnings/
3. How to Value Growth Stocks – https://www.fool.com/investing/2022/11/15/how-to-value-growth-stocks/
4. Intangible Assets Dominating the Economy – https://www.fool.com/investing/2021/04/01/intangible-assets-why-they-are-dominating-the-economy/
5. IP Risk in Technology Stocks – https://www.fool.com/investing/2024/01/02/what-happens-when-tech-stocks-lose-patents/

These resources provide additional depth on valuation trends, recurring revenue models, growth stock assessment, intangible asset impact, and intellectual‑property risk—all key themes that underpin the article’s central thesis.

Closing Thought

As the market’s valuation trajectory continues to evolve, the lesson remains clear: understanding the underlying business model—tangible versus intangible, one‑time versus recurring—is essential for evaluating whether a high P/E is justified or a warning sign. Investors who grasp this nuance will be better positioned to navigate the increasingly complex landscape of modern corporate earnings.