Crestmont P/E, Forward P/E, and the Valuation Gap Defining the Market Right Now

There are two valuations on the board, and they are telling different stories.

One says the S&P 500 is priced at its most expensive level in decades. The other says it is trading below its five-year average. Both are numerically correct.

That gap is the central tension of the current market.

Crestmont Research's normalized P/E ratio — which uses overlapping 50-year regressions of nominal GDP against reported earnings to strip out cyclical spikes and reveal a longer-run earnings base — came in at 43.8 for June 2026. That reading sits 185% above its long-term arithmetic mean and 212% above its geometric mean. Crestmont's own dashboard flags high P/E as a driver of below-average future returns.

Meanwhile, the forward P/E for the S&P 500 — price divided by what analysts expect companies to earn over the next 12 months — fell to 19.6 times by late July. That is below the index's five-year forward average of 20.2, and down roughly 10% from the 22.2 level the market traded at earlier in the year.

Both numbers are real. They are measuring different things. The one you trust depends on whether you believe the earnings surge that is compressing the forward multiple will sustain itself.

What happened in Q2 that pushed the two readings apart

The divergence is not an accounting glitch. It is the result of one of the fastest earnings accelerations the index has ever seen.

The blended S&P 500 earnings-growth rate for Q2 2026 reached 47.4%, up from 38.0% earlier in the quarter. That is the highest year-over-year earnings growth since Q2 2021. Eight of 11 S&P 500 sectors posted double-digit earnings growth, led by energy, communication services, consumer discretionary, and information technology. Analysts are penciling in swift growth going forward, largely based on expected returns from AI infrastructure investments. The result is a forward P/E that looks cheaper even as the index sits at or near record highs.

But Crestmont's methodology does not accept the current earnings run-rate at face value. By regressing earnings against nominal GDP over half-century windows, it smooths out periods of extraordinary profit growth. The June reading of 43.8 says that even after removing cyclical peaks, the market is pricing in a future where earnings growth far outpaces what the broader economy has historically delivered.

Crestmont's July 2026 update was published in early August, but its specific July reading was not available at the time of writing. The June number, however, already tells you which side of this debate the methodology sits on.

The other indicators confirm the picture — or try to complicate it

If you want to anchor the valuation debate in other metrics, the data fans out in the same direction:

• Shiller CAPE (the price-to-earnings ratio using inflation-adjusted earnings averaged over the past 10 years) was at 39.5 as of June, hovering near its highest level since the dot-com bubble.
• The Buffett indicator (total U.S. market capitalization divided by GDP) climbed above 230% in the second half of 2026 — the highest reading on record. Buffett himself called levels that high "playing with fire."
• Sales and free cash flow multiples, as noted by BofA Global Research, remain historically expensive even though the forward P/E looks cheaper.

The bullish counterargument is that the forward P/E compression during July's selloff was a multiple-contraction event, not an earnings collapse. Josh Jamner at ClearBridge Investments framed it as such — the selloff squeezed the multiple while earnings expectations held up. The S&P 500's PEG ratio (forward P/E divided by expected earnings growth) hit 1.02 on July 23, the lowest level since June 2012, suggesting the market may look inexpensive relative to the growth pipeline.

The risk the forward P/E hides

The forward multiple only looks cheap if AI capex delivers the returns analysts are counting on. That is the assumption doing the heavy lifting.

Savita Subramanian at BofA Global Research has drawn attention to the gap between year-over-year sales growth and capital-expenditure growth, which has widened considerably. If the AI buildout is viewed as a conventional capex cycle rather than an industrial revolution, Subramanian warns the market could face a "15% to 30% derating" once investors recognize that massive spending has consumed cash without proportional returns.

ClearBridge's Jamner disagrees, arguing that lagging revenue growth relative to capex is normal in the early innings of an infrastructure buildout. He may be right. The earnings surprises so far in Q2 — both in frequency and magnitude — have been above recent averages, which is the kind of real-time confirmation that keeps the forward multiple credible.

But here is the point the Crestmont P/E is designed to make: historically, periods where normalized P/E exceeds its mean by this magnitude have not ended well. The metric has been elevated above 100% of mean multiple times — most recently reaching 102% above mean in January 2017, when the market was at the 98th percentile of its 14-plus-decade history and near its highest level since the 2001 dot-com peak. The current reading of 185% above the arithmetic mean and 212% above the geometric mean is not even in the same neighborhood as that 2017 spike.

How to position when the valuation gap this wide is the dominant signal

The answer is not to pick a side and declare the other wrong. It is to structure around the uncertainty.

The forward P/E is cheap only if the AI-driven earnings growth cycle sustains through 2027 and beyond. That is a conditional, not a guarantee. The Crestmont P/E is expensive by every historical standard. That is a statement, not a conditional.

When you have one conditional and one statement pulling in opposite directions, the portfolio response is a barbell — not emotional conviction.

On the growth side, the names that are actually delivering the earnings growth behind the forward multiple — the companies in information technology and communication services leading the 47.4% growth print — deserve a place in the portfolio. If the AI cycle holds, they are the beneficiaries. They belong in the quality growth sleeve.

On the safety side, the names whose valuation is anchored to dividends, free cash flow yield, or tangible balance-sheet strength provide a hedge against the scenario where the AI capex cycle does not deliver at the scale the market is pricing in. They belong in the durable cash-flow sleeve.

The trigger to tilt toward one side or the other is not a headline or a pundit call. It is the earnings data itself. If the next two quarters confirm that Q2's 47.4% growth rate is a floor rather than a peak, the forward multiple argument gains traction and the Crestmont reading becomes a lagging signal from a regime that has fundamentally changed. If earnings growth decelerates sharply, the forward P/E reverts to looking expensive very quickly, and the Crestmont reading retroactively looks prescient.

Until then, the valuation gap is the signal. Structure accordingly.