Investors and consumers alike are worried about a potential bear market and recession. Since the start of 2026, the State Street SPDR S&P 500 ETF Trust (SPY 0.56%) — which tracks the broad S&P 500 index — has fallen in value by roughly 3%. That has investors shaken after several years of impressive stock market gains. And even after the small dip, markets still trade at nosebleed levels, especially according to one critical indicator.
This stock market indicator is sounding the alarm
Perhaps the most popular valuation metric used by investors is the price-to-earnings ratio. This essentially gauges how much investors are willing to pay for $1 in accounting profits. By averaging the price-to-earnings ratios of every company in a given index like the S&P 500, we can get a good sense of how pricey the stock market is overall.
Since 1870 — the first year data is available — U.S. stock markets have traded at an average price-to-earnings multiple of 15. The median over that time is a bit higher at roughly 16.
Given this information, alarm bells start to go off when you learn the price-to-earnings multiple of the S&P 500 index today is 29. The only times in history that markets have traded at higher multiples were immediately before the dot-com bubble crash in 2000, the weeks leading up to the financial crisis of 2008, and the 2020 pandemic flash crash.
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It is undoubtedly an uncertain time to be putting money to work. But here’s the thing: Historically, investing at the peak of a bubble was still a profitable investment if your time horizon was long enough.
Is there a bad time to invest?
Let’s say you continued to invest in the SPY S&P 500 index fund even at the top of the dot-com bubble. Today, you’d be sitting on a profit of more than 300%, even without accounting for dividends. Made the mistake of investing right before the financial crisis hit? No worries — you’d also be sitting on a gain of around 350%. Put money to work in 2020 before the pandemic correction wiped hundreds of billions of dollars in value from stock markets worldwide? If you continued to hold over the next six years, you would have doubled your money.
None of this is to say that stock markets won’t be incredibly volatile this year or into the near future. This may indeed prove to be a terrible time to put money to work over the short term. But over the long term, the most important part of the investment success puzzle has been getting money invested, not waiting on the sidelines for a more opportune moment.
Those with minimal funds to spare, such as people on a fixed income, may want to position their portfolio more defensively. But if you have a long investing time horizon and are willing to remain patient, don’t be scared about continuing to invest in broad-market index funds.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
