When looking at the S&P 500 today, you’d be forgiven for thinking the US stock market’s in a bubble. After all, the world’s riddled with geopolitical conflicts and trade route disruptions. And yet, US stocks are still trading near their highest level ever.
One metric in particular â the Cyclically Adjusted Price-to-Earnings (CAPE) ratio â shows just how ludicrous the situation has seemingly become, with the S&P 500 reaching valuations not seen since the dotcom bubble.
With that in mind, it’s no wonder that talk of a bubble, correction, or even full-blown crash are on the rise. But is this fear justified?
Not necessarily. Here’s why.
Understanding the data
An important mechanism of the CAPE ratio is that it’s ‘Cyclically Adjusted’. Unlike a regular P/E ratio, the CAPE ratio uses the average earnings of the last 10 years to smooth out the impact of outliers.
However, with enormous sums of capital pouring into AI enterprises such as Nvidia (NASDAQ:NVDA), earnings across the S&P 500 have drastically accelerated this year.
In fact, in every quarter of 2026 so far, average earnings growth for the companies in the index has exceeded 25%, with the most recent quarter reaching 29.5%. For reference, the average normally sits closer to 6.4%.
This huge earnings acceleration breaks the CAPE formula as it largely ignores the impact of near-term earnings. And when we remove the cyclical adjustment, the S&P 500 starts looking less like a bubble and more like a bargain.
A once in a lifetime opportunity?
As of September, the S&P 500’s forward P/E ratio sits at 18.8. That’s still elevated versus historical standards. But it’s nowhere near the euphoric levels seen during the dotcom era, or even during the more recent 2022 market correction.
And if we look at the PEG ratio, which factors in current growth rates, the S&P 500’s actually reached its cheapest level in more than 30 years!
So is now the time to go on a massive shopping spree?
What’s the best move in 2026?
This paradox of valuation ratios isn’t surprising when looking at the profits of companies including Nvidia. In fact, during its most recent quarter, the AI chip designer doubled its revenue once again to $96.2bn, with net income surging 126% from $26.4bn to $59.7bn year on year.
Obviously, this insane growth rate will eventually start to slow. The AI buildout that’s currently powering Nvidia’s gravy train won’t last forever. But when that will actually happen remains a mystery.
If the latest analyst coverage for Nvidia is anything to go by, it won’t happen anytime soon. In fact, the team at BNP Paribas has just issued a share price target of $345 â around 59% higher than where the shares trade today!
The bottom line
While Nvidia’s still worth considering, in my opinion, it isn’t a guaranteed winner. Competition in the chip space is starting to heat up. And with input costs rising simultaneously, the latest guidance from management actually hinted at some potential margin compression on the horizon. And a similar pattern’s emerging among other S&P 500 stocks.
When answering the question of whether the S&P 500’s in a bubble or is dirt cheap, the answer’s likely somewhere in the middle. Personally, I think being more cautious is shrewd, but I’m still looking for (and taking advantage of) opportunities whenever I see them.
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Zaven Boyrazian does not hold any positions in the companies mentioned.
The post Is the S&P 500 in a bubble? Maybe not⦠appeared first on The Twelfth Magpie.
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