Recently, I found myself in a familiar back-and-forth—one I’m sure many of you have heard lately. The question: Is the S&P 500 wildly overvalued? And more specifically, is it setting us up for a major correction?

The case some people make sounds simple: the S&P’s current price-to-earnings (P/E) ratio is well above historical averages. Therefore, they argue, we’re in a bubble. You can see this in the graphic below. Compare the typical P/E in the 1980s or even a decade ago to today, and it’s clear that it is higher than it once was.

S&P 500 P/E Ratio Over the Past 50 Years. Source: https://www.multpl.com/

But like most things in the investing world, the truth isn’t so black and white.

Let’s unpack the numbers—and more importantly, what they actually mean for investors like us.

Understanding the P/E Ratio (and Why It’s Not the Whole Story)

If you’re a bit rusty on the concept, the P/E ratio is just the price of a stock (or index) divided by its earnings per share. It’s often used as a quick way to tell whether something looks cheap or expensive. A high P/E might suggest that investors are paying more for each dollar of earnings—possibly because they expect strong growth in the future.

Now, it’s true that the S&P 500’s current P/E is higher than its long-term average. Depending on how far back you look and which methodology you use, that average falls somewhere between 16.1 and 24.8. That’s a wide range—and that alone should tell us that “average” is more of a moving target than a fixed rule.

Valuations change based on economic cycles, interest rates, and investor sentiment. So, comparing today’s P/E to a long-term average without any context can be misleading.

The Skewed Index: Why Averages Can Be Deceiving

Here’s where things get really interesting. The S&P 500 isn’t a flat list of 500 companies—it’s market-cap weighted, meaning that a few giant companies at the top have a disproportionate influence on the index’s overall performance and valuation.

Right now, those giants are almost all tech stocks, and many of them have sky-high P/E ratios. Take Tesla, for instance. The company didn’t even exist 25 years ago, and now it’s among the top 10 most heavily weighted stocks in the index—with a P/E ratio well over 120.

And it’s not alone. The top four companies in the S&P—think Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), Nvidia (NSDQ: NVDA), and Amazon (NSDQ: AMZN)—all trade at P/Es above 30. Since these few companies represent a large chunk of the index’s total weight, their valuations heavily skew the overall P/E ratio.

So, when people say, “the S&P 500 is overvalued,” what they often mean—without realizing it—is that a few mega-cap tech names are overvalued. That’s a very different takeaway.

What the Median Tells Us (and Why It Matters)

If you really want a clearer picture of how most stocks are priced, the better metric to look at is the median P/E—the valuation of the stock that falls smack in the middle when you rank all 500.

That number is currently closer to 20. In other words, the “typical” stock in the S&P 500 is trading at a valuation that’s historically normal—not frothy or unsustainable.

This simple shift in focus—from average to median—completely changes the narrative. It suggests that while a few companies may be priced for perfection, the bulk of the market isn’t.

Why This Perspective Matters

This isn’t just an academic point—it has real implications for how you manage your portfolio. If all you do is look at headlines screaming about bubble valuations, you might feel tempted to cash out or stop investing altogether.

But when you dig into the details, a more balanced picture emerges: yes, some high-profile stocks are expensive. But the vast majority of the index is still trading at reasonable levels, supported by earnings and modest growth expectations.

That doesn’t mean we’re free from risk. If interest rates stay elevated, earnings fall short, or we go into recession, even fairly valued stocks could take a hit. But it does mean that the broad narrative of “everything is overvalued” doesn’t hold up under closer inspection.

The Bottom Line

Markets are rarely as simple as they appear at first glance. Yes, the S&P 500’s average P/E ratio looks elevated—but once you peel back the layers, you see that a handful of mega-cap tech stocks are doing most of the heavy lifting.

The rest of the market? It’s far more grounded in fundamentals.

So, before you jump to conclusions or make big moves based on headlines, take a moment to look deeper. Focus on the median, not just the average. And most importantly, focus on individual businesses, not just index-level noise.

Because smart investing isn’t about reacting—it’s about understanding.