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On traditional earnings-based measures, the S&P 500 looked historically expensive in the latest dated snapshots available here—but another valuation framework gives a less extreme reading. The Federal Reserve’s November 2025 report said the index’s forward price-to-earnings ratio was well above its historical median and near the upper end of its historical range. Aswath Damodaran’s start-of-2026 data also put several P/E measures above their 2021–2025 averages. A Federal Reserve Bank of Minneapolis account of newer research, however, explains why valuations can look more consistent with history when judged against free cash flow. These readings are dated evidence, not an October 2026 live valuation.
What does “historically expensive” mean?
A market is expensive or cheap only relative to a chosen measure, a comparison period, and an observation date. A price-to-earnings ratio compares share prices with earnings, but the answer changes depending on whether those earnings are forecast, normalized, or averaged over a decade. Free-cash-flow analysis uses a different measure of what companies generate.
The S&P 500 is an index, not the whole U.S. stock market. FRED describes it as covering 500 leading companies and about 75% of U.S. equities; S&P Dow Jones Indices describes its coverage as approximately 80% of available market capitalization. Those are different descriptions of coverage, not a claim that the index includes every U.S. company. The S&P 500 price index also excludes dividends, so its price movement is not the same as an investor’s total return.
What do the dated earnings-based readings show?
Federal Reserve: forward P/E was high in November 2025
In its November 2025 Financial Stability Report, the Federal Reserve Board wrote: “The forward price-to-earnings ratio, defined as the ratio of equity prices to expected 12-month earnings, remained well above its historical median.” The report also characterized the ratio as near the upper end of its historical range. Forward P/E uses expected earnings for the next 12 months, so it depends on analyst estimates as well as market prices. Read the Federal Reserve’s asset valuations discussion.
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The same report said its equity-premium estimate was near a 20-year low as of October 2025. That estimate compared the forward earnings yield with an expected real Treasury yield; it is a separate valuation signal, not another P/E ratio.
Damodaran: start-of-2026 P/E measures exceeded recent averages
Aswath Damodaran’s start-of-2026 dataset reported an S&P 500 P/E of 25.21, normalized P/E of 37.14, and CAPE of 32.41. For 2021–2025, the corresponding reported period averages were 22.33, 33.32, and 29.12. On those specific comparisons, each start-of-2026 reading was higher than its recent-period average. These are start-of-year readings, not October 2026 values. See Damodaran’s 2026 data update.
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Those three ratios do not use identical earnings denominators. The plain P/E, normalized P/E, and CAPE should be read as distinct measures, not interchangeable versions of a single universal valuation number.
What is the S&P 500 CAPE ratio?
CAPE, or cyclically adjusted price-to-earnings ratio, compares prices with a decade of inflation-adjusted earnings. Using a longer earnings window can smooth some business-cycle swings that distort a single year’s earnings. It also means CAPE reacts more slowly when corporate profitability or the economic regime changes. The start-of-2026 CAPE of 32.41 and 2021–2025 average of 29.12 are Damodaran’s reported figures; they should be interpreted with that historical earnings basis in mind.
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Why can free-cash-flow analysis give a different answer?
Accounting earnings and free cash flow are not the same denominator. A Federal Reserve Bank of Minneapolis account of research by Atkeson, Heathcote, and Perri describes an approach that evaluates aggregate U.S. company valuations against free-cash-flow generation. Under that framework, valuations look historically consistent with cash generation, although the article notes that free-cash-flow yield has declined since 2023.
This is not a direct S&P 500 CAPE calculation: it uses a broader aggregate-company lens and a different measure of business performance. The article quotes the economists: “Persistently low earnings yields need not reflect mispricing, bubbles, or unusually low discount rates.” It also reports their view that “We should not expect traditional stock market valuation metrics other than free cash flow yield to return to their historical means.” Read the Minneapolis Fed account.
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How should you compare the measures?
| Measure | What it compares | What its dated reading says | Main qualification |
|---|---|---|---|
| Forward P/E | Price against expected next-12-month earnings | Federal Reserve: well above its historical median and near the upper end of its historical range in November 2025 | Forward earnings rely on estimates; the Fed report’s description is not an October 2026 reading. |
| P/E | Price against the earnings basis used in Damodaran’s dataset | 25.21 at the start of 2026 versus a 22.33 average for 2021–2025 — Damodaran | Keep the dataset’s specific definition and date attached to the figure. |
| Normalized P/E | Price against normalized earnings | 37.14 at the start of 2026 versus a 33.32 average for 2021–2025 — Damodaran | Normalization differs from forecast earnings and a ten-year inflation-adjusted earnings average. |
| CAPE | Price against ten years of inflation-adjusted earnings | 32.41 at the start of 2026 versus a 29.12 average for 2021–2025 — Damodaran | The long window smooths cyclical swings but can lag changes in business conditions. |
| Free-cash-flow yield framework | Aggregate company valuations against free-cash-flow generation | The Minneapolis Fed’s 2026 account says valuations look historically consistent with cash generation and notes a decline in free-cash-flow yield since 2023. | Broader company universe and different denominator; not an S&P 500 CAPE figure. |
The table’s figures come from different sources, dates, and methods, so they are best used to understand the direction of each comparison rather than treated as a single synchronized market snapshot. A median is also not the same reference statistic as an average.
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1Fix the driver behind crashes, sound loss and screen glitches2Repair Windows errors before they cause bigger problems3Scan for outdated or missing drivers - takes under a minuteSo, is the S&P 500 overvalued compared with history?
The qualified answer is that traditional earnings multiples indicated an expensive market in the latest documented snapshots, while the free-cash-flow framework described by the Minneapolis Fed offered a less out-of-line historical comparison. The conclusion depends on which denominator and historical reference you choose. The cited material does not establish a valuation multiple for October 7, 2026, and historical valuation measures alone are not precise short-term market-timing signals.
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Sources
- Federal Reserve Board, Financial Stability Report — Asset Valuations, November 2025
- Aswath Damodaran, NYU Stern, Data Update 2 for 2026
- FRED, S&P 500 (SP500) series notes
- Federal Reserve Bank of Minneapolis, From price-to-earnings to “free cash flow”
- S&P Dow Jones Indices, S&P 500 Index
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