Are U.S. Stocks Overhyped—or in a Bubble?

A 10-year, forward P/E reality check (S&P 500, Nasdaq-100, Russell 2000)

Disclaimer (Important): This article is for informational and educational purposes only. It does not constitute investment, financial, legal, accounting, or tax advice; it is not a recommendation or solicitation to buy, sell, or hold any security or strategy. The analysis is general in nature and does not consider your objectives, financial situation, or needs. Do your own research and consider consulting a licensed financial professional. Investing involves risk, including the possible loss of principal.

If you only skim headlines, the market can feel like one giant victory lap: record highs, AI everywhere, everyone’s a genius. But prices alone don’t tell the story. Valuation does—specifically forward P/E (price divided by the next 12 months of expected earnings). It’s a simple question: How many dollars are we paying today for one dollar of next year’s profits?

We pulled a clean, monthly forward P/E (4PE) series for the past decade (2015–2025) for three major U.S. indexes—S&P 500, Nasdaq-100, and Russell 2000—and used it as our north star. What follows isn’t a report; it’s an essay built around the data’s biggest “huh?” moments and what they really meant.

Figure 1. A decade of forward P/E, monthly. This is the “big picture” we’ll keep referring to.

---

First, a 30-second primer on forward P/E (4PE)

• Numerator (Price): moves minute-to-minute.
• Denominator (Expected Earnings): moves slower and is based on analysts’ forecasts.
• Higher 4PE = investors are paying up today because they expect faster growth, lower risk, or both.
• Lower 4PE = either prices fell or earnings expectations rose (or both).

Crucially, 4PE can jump for good reasons (optimism about real growth)…or weird reasons (earnings temporarily collapsing). Keep that in mind.

---

What the last 10 years actually looked like

1) 2015–2019: The “Goldilocks” baseline

In our dataset, the S&P 500 mostly hovered in the mid-to-high teens on 4PE. That’s not cheap, not insane—just the going rate for steady growth with tame inflation. The Nasdaq-100 sat higher (tech premium), and small caps (Russell 2000) traded around the high-teens to ~20s, wobblier but still within shouting distance of normal.

Takeaway: This is our mental baseline. When people say “historically average,” this era is what they usually mean.

---

2) Late 2018: The air pocket that lowered 4PE

Remember the sudden Q4 selloff in 2018? Prices puked, earnings didn’t collapse, and 4PE actually fell (S&P dipped toward the mid-teens). That’s the valuation math doing its job: when prices drop faster than earnings expectations, stocks get cheaper on 4PE—even if it doesn’t feel that way in your brokerage app.

What happened: Growth scare + Fed tightening worries.
Why it matters: A market can become cheaper on 4PE without a recession—sometimes it’s a fear-driven repricing.

---

3) 2020: The weirdest spike you’ll ever see

Our Russell 2000 series shows an enormous, almost cartoonish spike in spring 2020. No, small caps didn’t become luxury goods overnight. The spike happened because earnings evaporated—the denominator collapsed—while prices didn’t fall proportionally (and then rallied on stimulus). Forward P/E shot up into the stratosphere not because investors lost their minds, but because math did when profits briefly went missing.

What happened: Pandemic lockdowns and an earnings black hole.
Why it matters: A huge 4PE can mean “euphoria,” but it can also mean a temporary earnings vacuum. Context is everything.

---

4) 2021–2022: Gravity returns (a.k.a. rate hikes)

As the world reopened and the Fed started raising rates, multiples compressed. In our data, the S&P’s forward P/E slid back closer to the high-teens/low-20s, the Nasdaq’s came down from the high-20s/low-30s, and small caps deflated from the pandemic distortion. Prices cooled, earnings recovered—denominator healed, numerator sobered up.

What happened: Inflation + tightening cycle.
Why it matters: Higher rates raise discount rates, which mathematically lowers what investors are willing to pay for future dollars—hence lower P/Es even if earnings don’t crater.

---

5) 2023–2025: The AI premium—and a split market

Here’s where the Nasdaq-100 stands out. Our series shows it settling back into the high-20s on 4PE, reflecting cash-generative giants priced for strong AI-era growth. The S&P 500 pushes into the low-20s (and higher at times), lifted by mega-caps. The Russell 2000 sits in the mid-20s, but with asterisks: many small-cap constituents have patchy profits, which can keep 4PE artificially high.

What happened: AI-capex boom, Big Tech dominance, soft-landing hopes.
Why it matters: Today’s 4PEs are above the 2015–2019 baseline—especially for tech—without the earnings vacuum excuse. Investors appear to be paying up for growth.

Figure 2. The same series with four “huh?” moments marked: late-2018 reset, 2020 earnings vacuum, 2022 compression, 2023–2025 AI re-rating.

---

“Overhyped” vs “Bubble”: what the data suggests

Overhyped can mean “priced for perfection.” Bubble implies “divorced from cash flows.” The last decade of 4PE points to a more nuanced picture:

• S&P 500: Elevated, not unhinged. A 4PE in the low-20s is high vs the last cycle’s average, but not dot-com-era extremes. It embeds assumptions about solid earnings growth and a benign rate path.
• Nasdaq-100: Expensive for identifiable reasons. High-20s forward P/E is a premium, commonly associated with dominant platforms and visible monetization vectors in AI and cloud.
• Russell 2000: Requires care in interpretation. A mid-20s 4PE can overstate small-cap optimism because many members are barely profitable or unprofitable; the denominator is fragile.

Figure 3. Today vs the 10-year average. A quick way to see “priced for perfection” zones.

Bottom line: Valuations look expensive, not obviously a bubble. The irregular spikes mostly align with earnings math (2020) or rate-driven multiple compression (2018, 2022), not pure mania.

---

The four “irregular points” worth recognizing

1. Late-2018 4PE down

   • Signal: Fear repriced risk; valuations reset without an earnings crash.

2. Spring 2020 small-cap 4PE up (way up)

   • Signal: Earnings disappeared; denominator effect.

3. 2022 compression across indexes

   • Signal: Rate hikes raised discount rates; P/Es fell accordingly.

4. 2023–2025 AI re-rating

   • Signal: Investors appear willing to pay premia for durable, compounding growth in platforms and infrastructure.

---

How to interpret this data (general considerations, not advice)

• Valuation vs earnings path: One common lens is to compare price moves with earnings-estimate revisions. Elevated 4PEs can normalize if estimates rise faster than prices.
• Index composition matters: Sectors and profitability profiles differ; 4PEs across S&P 500, Nasdaq-100, and Russell 2000 aren’t directly comparable.
• Rates and duration: Valuation multiples are sensitive to interest-rate expectations and the timing of cash flows.
• Time horizons: Outcomes vary by horizon; starting valuations can influence long-run return distributions.

---

Full Disclaimer

This content is provided by NextInvest (the “Publisher”) strictly for informational and educational purposes. It is not intended as, and must not be construed as, investment advice, a recommendation, an offer, or a solicitation to buy or sell any securities, financial products, or strategies. The Publisher is not a registered investment adviser or broker-dealer and does not provide personalized advice.

No recommendations. Any tickers, indexes, sectors, models, or strategies discussed are referenced solely to illustrate concepts. Their inclusion does not imply suitability or endorsement.

General, not personal. The analysis is general in nature and does not take into account your objectives, financial situation, or needs. You are responsible for your own investment decisions.

Data & assumptions. Figures (including forward P/E series) are compiled from publicly available sources believed to be reliable but not guaranteed. Data may be estimated, delayed, revised, or incomplete, and methodologies can differ across providers. Historical and back-tested results are not indicative of future performance.

Risks. All investing involves risk, including loss of principal. Market conditions, interest rates, earnings, and other factors can change quickly and materially.

Forward-looking statements. Any views about future conditions or outcomes are opinions and inherently uncertain. Actual results may differ materially.

No liability. The Publisher and its contributors disclaim any liability for errors or omissions and for any losses or damages arising from use of this content.

If advice tailored to your circumstances is needed, please seek guidance from a qualified, licensed financial professional in your jurisdiction.