The S&P 500 is up double digits this year, while its cyclically adjusted P/E has stayed above 40. The Fed raised its benchmark rate to 3.75%–4%; both are pullback warning signs, but whether a downturn will follow is unknown.
The cyclically adjusted P/E, or CAPE, compares the index’s price with its average inflation-adjusted earnings over the previous decade. The article says it exceeded 40 earlier this year and has stayed there; the only other time it reached that level in records going back to the 1800s was during the dot-com bubble. The Buffett indicator, measured as the Wilshire 5000’s value divided by U.S. GDP, recently topped 235%, an all-time high. The article describes 75%–90% as reasonable and readings above 120% as overvalued.
Since the Fed began announcing target rates in 1994, RBC Wealth Management says stocks fell 8%–14% from their peaks in five of six tightening cycles. In 2022, the S&P 500 dropped 25% and bottomed about seven months after the first hike. The article says the warning-sign samples are too small for statistical significance; it also cites gains in 95% of the S&P 500’s 12-month periods after midterm elections since 1938, along with AI demand and less-cyclical megacap businesses as counterweights. The Fed indicated another increase later this year.
