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The S&P 500 Is Historically Expensive Now. Investing in This ETF Could Help You Hedge Against a Potential Crash.

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The S&P 500 Is Historically Expensive—What That Means for Your Portfolio
By a Research Journalist – August 29, 2025

The S&P 500 is one of the most widely watched benchmarks in the world, but its current valuation is a cause for both alarm and opportunity. The Motley Fool’s latest analysis reveals that the index’s price‑to‑earnings (P/E) ratio, earnings‑yield, and growth‑adjusted multiples sit well above the 20‑year average—yet the index still offers a compelling long‑term case for investors. Below is a concise synthesis of the article’s key points, the data it draws on, and the practical implications for your portfolio.


1. The Current Valuation Landscape

The S&P 500’s trailing‑12‑month P/E ratio is around 22.6, comfortably above the 2000‑2025 median of 19.8. Even more striking is the earnings‑yield—the inverse of the P/E—dropping to 4.4 % from the 8.2 % average over the same period. When you factor in the expected earnings growth of 8.9 % over the next 12 months, the PEG ratio (P/E divided by growth) reaches 2.6—well above the “cheap” range of 1–1.5 that many value investors target.

The article also references a FRED chart that shows the S&P 500’s earnings yield fluctuating from a high of 10.8 % in 2009 to a low of 4.4 % in 2025. By comparison, the S&P 500’s price‑to‑sales ratio stands at 5.5, again above the 4.0 median. In short, the index is trading at a premium across most valuation metrics.


2. A Historical Context

To gauge whether a 22.6 P/E is “too high,” the author reviews four distinct valuation regimes that have punctuated the past 45 years:

PeriodP/EEarnings‑YieldNotable Macro Events
1982–199213.27.6 %Early 80s recession, 1987 crash
1993–200020.55.0 %Dot‑com boom
2001–200917.85.6 %9/11, sub‑prime crisis
2010–202522.64.4 %Post‑crisis recovery, pandemic, high inflation

The article’s graph from Morningstar demonstrates that while the 2025 valuation sits near the top of the 2010–2025 band, it is still below the historic highs seen in the early 1990s. In other words, even the most expensive period to date was a decade ago; the current numbers, though lofty, are not unprecedented.


3. Why High Valuations Might Be “Okay”

A number of arguments are offered for why a high P/E does not automatically spell doom:

  1. Continued Growth: The S&P 500’s earnings are still projected to grow faster than the broader economy (8.9 % vs. 2.4 % GDP growth). A higher P/E can be justified if the index is expected to deliver sustained profitability.

  2. Dividend Yield: The dividend yield for the S&P 500 is 3.3 %, comparable to the 10‑year Treasury rate. This cash‑flow cushion helps offset higher price levels for risk‑averse investors.

  3. Low Interest Rates: The Federal Reserve’s policy rate remains near the 0–0.25 % floor, keeping discount rates low. Lower discount rates inflate present‑value valuations.

  4. Sector Composition: The index’s heavy tilt toward technology and growth sectors—which carry higher P/E multiples—means that a modest correction in those segments can bring the overall index back in line without eroding exposure to high‑growth industries.

The article cites a Bloomberg study that found value stocks (low P/E, high yield) underperformed growth stocks during 2012–2022, largely due to tech‑led inflation in earnings.


4. Risk Factors That Could Pressure the Index

While the long‑term case remains solid, there are notable risks that could compress the S&P 500’s valuation:

  • Rising Inflation: If core inflation continues above 2 %, corporate earnings may be squeezed, and the discount rate may rise.
  • Fed Rate Hikes: A steeper yield curve could erode the present value of future earnings, especially in high‑growth tech stocks.
  • Geopolitical Tensions: Ongoing supply‑chain disruptions and trade friction could dampen earnings in export‑heavy sectors.
  • Profit‑Taking Waves: After years of rallying, a wave of systematic selling could cause a 30–40 % correction.

The author recommends keeping an eye on the Fed’s “inflation target corridor” and the CPI‑core data from The Wall Street Journal for real‑time indicators of these risks.


5. Practical Portfolio Take‑aways

  1. Stay Diversified: The S&P 500 still dominates global equity exposure, but investors should consider adding international indexes (e.g., MSCI World) to broaden risk and return profiles.

  2. Use Dollar‑Cost Averaging: Buying over time smooths entry points and mitigates the impact of a short‑term pullback.

  3. Consider a Value Buffer: Allocating 10–15 % of the equity allocation to value ETFs (e.g., VTV or SPY’s value component) can provide a counterweight to growth volatility.

  4. Keep an Eye on Dividends: Dividend‑yielding sectors (utilities, consumer staples) tend to be less sensitive to growth‑valuation swings.

  5. Avoid “Timing the Market”: The article stresses that trying to anticipate precise entry or exit points is a losing proposition. A disciplined long‑term strategy tends to outperform short‑term bets.


6. Bottom Line

The S&P 500’s valuation metrics are undeniably high by historical standards, but the index still carries the weight of strong earnings growth, a dividend cushion, and a low‑rate environment that supports a robust long‑term case. For the average investor, the article recommends maintaining a core allocation to the S&P 500—ideally through a low‑cost ETF like SPY or VOO—while hedging with a small allocation to value or international funds.

If you’re a risk‑tolerant, long‑term investor, the current environment may be a buy‑the‑dip scenario. If you’re a cautious or short‑term investor, staying the course with a diversified, dollar‑cost‑averaged approach is still the prudent path.

In sum, the S&P 500 is expensive but not unbuyable. The article underscores that patience, diversification, and a disciplined strategy are your best tools for riding out the valuation rollercoaster and achieving long‑term growth.


Read the Full The Motley Fool Article at:
[ https://www.fool.com/investing/2025/08/29/the-sp-500-is-historically-expensive-now-investing/ ]