US stock prices have surged to historic highs in the leadup to the Federal Reserve's interest rate cut this week.

To judge whether the market is expensive, many investors turn to price-to-earnings ratios, which track how much people are willing to pay for every dollar of company profit. One of those ratios, called the Shiller P/E ratio, suggests that today’s US stock market is at a near 30-year valuation high.

The current Shiller P/E sits at 39.78, far above its long-term average of about 29 since 1995. Some analysts believe that levels between 20 and 25 are generally considered normal. When the ratio rises into the low 30s, stocks are sometimes seen as becoming expensive. Once the Shiller P/E reaches the high 30s, history suggests that the market may be becoming overvalued. These levels have previously been reached during the dotcom boom and briefly during the COVID-19 pandemic.

Another way to think about the current P/E ratio is that today investors are paying nearly 40% more for shares than has been typical since 1995. Even if last night’s rate cut from the Fed gives shares a short-term boost, the historical trend shows that when prices move this far above their usual range, future returns often disappoint.