It helps to adjust for inflation in thinking about whether the S&P500 is over-valued. Core CPI in the US is up 22% since Jan 2020. The graph shows the S&P500 adjusted for inflation. The inflation adjusted level is not much above the peak in Nov 2021, three and a half years ago.
That previous peak was before the market surged with the excitement over AI. To restate, even after all of the increased earnings expectations from AI news over the last three years, the S&P500 is only slightly higher, on an inflation adjusted basis, than it was in Nov 2021.
There are other, and better, measures of whether the S&P500 is over-valued; such as PE ratios, Shiller CAPE ratio, the ratio to GDP, etc.
I am going to talk about all that and a lot more in my webinar ‘Share Investing in Uncertain Times’ on 31 March.
Copyright Sam Wylie March 2025