Stein’s Law states that if something cannot go on forever, it will stop. Let’s bear this in mind as we look at the future of stock markets. In particular to the S&P 500 index, made up of U.S. equities, because that’s where prices have risen the most and where historical data is widely available.
By 2012, U.S. stock prices had largely recovered from the depths of the Great Recession of 2008-09. The S&P 500 index stood at nearly double the low point it had reached in March, 2009, and the average price-to-earnings (P/E) ratio of S&P 500 companies had risen to nearly 15, which is the approximate long-term average.
But this was only the beginning. Over the next 14 years, the index soared another 431 per cent. By comparison, a portfolio of 91-day T-bills would have risen a mere 25 per cent over the same period.
This is where Stein’s Law becomes relevant. The reason stock prices cannot continue to climb so quickly is that prices are currently so high for the wrong reasons. The right reason, if it were true, would be that companies’ earnings suddenly started to rise more rapidly after 2011.
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In the years since 2012, however, the average earnings of S&P 500 companies have gone up at the rather tepid annual rate of 2.4 per cent, net of inflation. Between 1960 and 2011, they rose 2.6 per cent a year.
There are two reasons – one minor and one major – for today’s stratospheric stock prices. The minor reason is that bond yields are somewhat lower than the historical average.
Stocks compete with bonds for investors’ money so lower yields mean higher prices for both types of securities. This is a relatively minor factor because the current yield on 10-year U.S. Treasuries is 4.25 per cent, not that much lower than the median yield between 1960 and 2011 of 5.45 per cent.
This brings us to the major reason for today’s high stock prices: P/E ratios today are so much higher than the long-term average. As of January, 2026, the average P/E ratio was 31 versus the average of 18 between 1960 and 2011.
This week’s chart shows two possible trajectories for the S&P 500 index between now and 2040. In the first scenario, the P/E ratio remains 30. Given that this is about double the long-term average since records were first kept and given that a P/E ratio of 30 has never been sustained for longer than two years, the probability I would attach to this scenario is very low.
In the second scenario, we would see a reversion to the mean. Specifically, the P/E ratio would gradually decline to 18, its average since 1960. In both scenarios, I assume that the earnings of S&P 500 companies continue to rise in real terms at the same rate as they have historically.
The second scenario is a rather bleak one but it actually seems more plausible than the first. At some point, Stein’s Law will assert itself. Stocks will continue their upward march, but not at the pace we have seen over the past 14 years.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)