The market has re-found its footing, and the bulls have the ball right now. Oil prices have fallen roughly 6% as President Trump signals a potential Iran deal "could be announced shortly," taking a major inflation risk off the table. Brent has dropped back below $100, the S&P has reclaimed 7,500, and the VIX at 16.59 suggests complacency is returning. Earnings have proven resilient, corporate margins are holding despite inflationary headwinds, and the AI capex cycle shows no signs of slowing. Add in the rumored IPO pipeline (SpaceX filed, OpenAI, Anthropic on deck?), and you have the ingredients for continued momentum.
But.
While the cyclical backdrop remains constructive, the arithmetic of valuation tells a different story for medium to long-term investors. Today's market is priced for perfection at a time when perfection is the bare minimum required to avoid disappointment. The trailing P/E at 28x sits at the 98th percentile of all observations going back to 1950. History says to expect an annualized return of roughly 2-4% over 3–5 years, negative on an inflation adjusted basis. The second risk is an actual real loss. Since 1950, at a trailing PE of 28x or higher, the odds of a negative total return are between 33-43%. The table below highlights the data.
The table tells you the aggregate story. History fills in the texture.
Since 1950, there have been a handful of periods when trailing P/Es reached or exceeded current levels, and they did not all resolve the same way. In the early 1990s, the multiple looked expensive because earnings had collapsed in the recession, not because price had run away. Investors who looked through the distortion and bought the recovery were right. The "expensive" P/E was a statistical artifact of the cycle trough.
The late 1990s were a different problem. Multiples expanded because price ran ahead of earnings. There was no recovery coming to bail out the patient investor. The valuation was the problem, and it eventually repriced violently.
Today sits in the second category. Earnings have held. Margins are intact. At 28x, the market is not distorted by a temporary earnings dip; it reflects what investors are genuinely willing to pay for a dollar of current earnings.
That is a harder starting point. The historical record at this specific level, only 27 observations since 1950, is consistent: mean three-year returns of 2.2%, with losses concentrated in the two worst episodes of the modern era. Strong outcomes required either a significant re-rating of earnings growth or the luck of entering just before a post-crash recovery. Neither is a base case today.
The lesson is not that 28x always ends badly. It is that when the multiple is high because price outran earnings, the margin for error is thin and the burden of proof is on the bull.
So what do you do? You don’t sell everything and hide in cash. The wrong lesson is to fight the momentum; the right lesson is to stop paying full price for it. Three places where the math still works: