Key Points
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The S&P 500 is trading above 30 times earnings for the first time in five years.
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Rising interest rates killed its previous rally, which peaked in late 2021 and early 2022.
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But this time around, interest rates are high, and AI stocks are doing the heavy lifting.
- 10 stocks we like better than Vanguard S&P 500 ETF ›
The S&P 500 has rallied about 80% over the past five years and is hovering near its all-time high. However, it’s also trading at 33 times its trailing earnings, which is much higher than its historical average of 20-21 times earnings. In fact, the last time the S&P 500 traded above 30 times earnings was early 2021, when historically low interest rates, stimulus checks, and social media buzz sparked a buying frenzy in meme and hypergrowth stocks.
So does the S&P 500‘s historically high multiple indicate it’s time to brace for a market crash? Let’s see what happened five years ago and whether history will repeat itself.
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What happened in 2021?
Five years ago, the growth of commission-free trading platforms like Robinhood, a rising interest in meme stocks like GameStop on social media platforms such as Reddit, and a contagious “fear of missing out” drove millions of retail investors into the stock market. Near-zero interest rates amplified those gains by forcing investors to seek higher returns beyond traditional CDs and savings accounts.
During that period, the massive rallies in GameStop and other meme stocks drove many investors to buy other hypergrowth stocks trading at sky-high valuations. That rising tide drove the S&P 500 to multi-year highs, even as many analysts warned the gains were unsustainable.
By Jan. 1, 2021, the S&P 500 was trading at nearly 40 times its trailing earnings. Its price-to-earnings ratio actually declined throughout the rest of the year, but the index still rallied 27% to a new record high on Dec. 30, 2021.
That might seem like a contradiction, but the surge in post-pandemic spending in 2021 distorted its valuation. That recovery boosted the S&P 500’s corporate earnings so much that it actually justified the index’s higher price and reduced its price-to-earnings ratio. However, that overheating economy — along with Russia’s invasion of Ukraine in early 2022 — caused severe inflation. To tame inflation, the Fed raised its rates 11 times in a row in 2022 and 2023.
Those rate hikes drove investors from riskier stocks toward more conservative investments, ending the meme stock rally and quickly chilling the S&P 500’s valuations. By the end of the third quarter of 2022, the S&P 500’s trailing P/E ratio had shrunk to 19. The index had also pulled back 25% from its record highs in early 2022, putting it firmly in a bear market.
What’s different in 2026?
Today, the S&P 500’s valuations look as frothy as they did in 2021, but its catalysts are different. Most of the index’s rally over the past five years was driven by Nvidia (NASDAQ: NVDA), its Magnificent Seven peers, and other AI-driven tech giants. The gains from those stocks masked the slower growth of sectors more exposed to macro headwinds.
Back in 2021, there were only six trillion-dollar companies. Today, there are 14. Nvidia was only worth $735 billion. Now, it’s worth $5.2 trillion and the world’s most valuable company.
Some analysts claim those soaring valuations are “decoupling” the trillion-dollar companies from the rest of the S&P 500. They’re also distorting the valuations of the other S&P 500 companies.
Interest rates are also much higher than they were in 2021. The Fed cut its benchmark rate six times in 2024 and 2025, but it’s still at 3.50%-3.75%. Since it’s easy for investors to get decent yields through CDs, savings accounts, and fixed-income investments, there isn’t a burning need to chase higher-growth or higher-yielding stocks.
Historical returns aren’t reliable right now
After the S&P 500’s P/E ratio peaked in 2021, the index rallied through the end of 2021, stagnated throughout 2022 and 2023, but hit fresh highs in 2024, 2025, and 2026.
However, past performance never guarantees future gains — and the S&P 500’s situation is completely different today. If the AI boom continues and propels Nvidia and its Magnificent Seven peers to fresh highs, the S&P 500’s valuations could expand further.
But if AI spending abruptly declines and those leaders lose their momentum, the S&P 500’s valuations could quickly drop back to their historical averages. Therefore, investors shouldn’t assume the S&P 500 will pull back simply because it’s trading at over 30 times earnings again. But over the long term, investing in the S&P 500 through a simple ETF — like the Vanguard S&P 500 ETF (NYSEMKT: VOO) — should still pay off as the U.S. economy keeps growing.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Reddit, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
