By traditional earnings measures, the S&P 500 looked expensive in the latest dated evidence available here—but a broader free-cash-flow analysis gives a less stark comparison with history. The answer changes with the earnings or cash-flow measure, the historical benchmark and the observation date. The latest concrete readings cited below are from November 2025 and the start of 2026; they are not October 2026 market readings.
What does “historically expensive” mean?
A valuation measure relates a share price or market value to a financial denominator, such as earnings. Calling the S&P 500 expensive therefore requires specifying which denominator is used, which historical period is the comparison, and when the measure was observed. A high multiple can indicate that investors are paying more for each dollar of the measured earnings; it does not, by itself, establish when prices will fall or what returns will follow.
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The measures below are not interchangeable. Forward P/E relies on forecasts, CAPE uses a decade of inflation-adjusted earnings, and free-cash-flow yield evaluates cash generation rather than accounting earnings. Their different signals are not necessarily contradictory.
What do the dated valuation readings show?
| Measure | Denominator and comparison | Dated evidence |
|---|---|---|
| Forward P/E | Equity prices divided by expected earnings over the next 12 months; the Federal Reserve compared it with its historical median and range. | In its November 2025 Financial Stability Report, the Federal Reserve said the ratio remained well above its historical median and near the upper end of its historical range. Federal Reserve Board, November 2025. |
| P/E | Earnings multiple; the cited dataset reports a start-of-year value and a 2021–2025 period average. | 25.21 at the start of 2026; 22.33 average for 2021–2025 — Aswath Damodaran, 2026 dataset. |
| Normalized P/E | P/E using normalized earnings; it is distinct from the standard P/E and CAPE. | 37.14 at the start of 2026; 33.32 average for 2021–2025 — Aswath Damodaran, 2026 dataset. |
| CAPE | Price relative to a decade of inflation-adjusted earnings, smoothing some year-to-year and business-cycle variation. | 32.41 at the start of 2026; 29.12 average for 2021–2025 — Aswath Damodaran, 2026 dataset. |
| Free-cash-flow lens | Cash generation rather than accounting earnings; the cited analysis concerns aggregate U.S. company valuations, not a direct S&P 500 CAPE calculation. | The Minneapolis Fed’s 2026 account says this framework makes valuations look historically consistent with cash generation, while noting that free-cash-flow yield has declined since 2023. Federal Reserve Bank of Minneapolis, 2026. |
The Damodaran numbers are historical, dated readings—not live October 2026 values. The P/E and normalized P/E comparisons use their respective reported 2021–2025 averages; the Federal Reserve’s forward-P/E statement uses a historical median and range. An average and a median are different reference points, so those comparisons should not be blended into one benchmark.
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What is the S&P 500 CAPE ratio?
CAPE stands for cyclically adjusted price-to-earnings ratio. It compares market prices with average earnings over a long period, adjusted for inflation; in this context, the earnings window is ten years. By using a decade rather than a single year, CAPE can make the denominator less sensitive to a temporary earnings boom or slump.
That smoothing comes with a trade-off: a ten-year measure responds slowly when the economy, corporate profitability or market conditions change. CAPE can therefore tell a different story from a forward P/E based on expected earnings over the coming 12 months. Neither is a direct short-term forecast.
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Why do different valuation measures disagree?
They use different denominators
Forward P/E depends on analyst estimates for the next 12 months. Those estimates can change, so the resulting multiple is not a fixed accounting record. CAPE uses a long history of inflation-adjusted earnings. Normalized P/E uses normalized earnings, while a free-cash-flow approach asks how valuations compare with cash generation. A conclusion based on one denominator does not automatically carry over to another.
They compare against different versions of history
A statement that a ratio is above its historical median is not the same as a comparison with a recent-period average. The Federal Reserve’s November 2025 description of forward P/E uses its historical median and range; Damodaran’s cited figures include averages for 2021–2025. The comparison window and statistic matter as much as the headline multiple.
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Accounting earnings and cash flow answer different questions
The Minneapolis Fed’s 2026 account explains why a cash-flow framework can make aggregate U.S. company valuations appear more consistent with history than traditional earnings multiples suggest. It also reports that free-cash-flow yield has fallen since 2023. This is a different analytical lens and company universe, not proof that the S&P 500 is cheap by every measure.
What does the evidence support—and what does it not?
The documented earnings-based readings point toward an expensive market relative to their cited historical comparisons: the Federal Reserve described forward P/E as well above its median and near the upper end of its range in November 2025, and Damodaran’s start-of-2026 P/E, normalized P/E and CAPE readings each exceeded their 2021–2025 averages. The cash-flow account offers a less out-of-line historical interpretation for aggregate U.S. companies, but it does not erase the earnings-multiple evidence.
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These sources do not establish a valuation multiple for October 7, 2026. Nor do the cited historical comparisons determine whether the market is about to rise or fall. Valuation is useful for describing the price investors pay relative to a chosen financial measure; it is not a precise market-timing signal.
What exactly does the S&P 500 represent?
The S&P 500 is a broad U.S. equity index, not the whole stock market. FRED describes it as covering 500 leading companies and about 75% of U.S. equities; S&P Dow Jones Indices describes it as covering approximately 80% of available market capitalization. These percentages use different descriptions of the denominator and should not be treated as identical. See FRED’s S&P 500 series notes and S&P Dow Jones Indices’ index description.
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The quoted index is a price index and excludes dividends. Its price movement is therefore not the same as an investor’s total return when dividends are included. FRED’s series notes identify the S&P 500 as a price index: FRED, S&P 500 (SP500).
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