The 'VOO Has Never Failed' Narrative Ignores The Second-Highest Valuation In 150 Years

I always keep an eye out for irrational false narratives that take the market by storm, and this one is among the most seductive I've seen in 2026. The argument goes like this: a bear market is coming, so buy the Vanguard S&P 500 ETF (VOO) - because history shows it has never let investors down. The piece usually cites Warren Buffett, charts the S&P 500's recovery from 2008, 2020, and 2022, and closes with the comforting implication that doubling down on the broad market is the ultimate defensive move.

The premise contains a true fact wrapped in a false conclusion. Yes, the S&P 500 has recovered from every bear market since its inception. But the narrative quietly drops the one variable that matters most for timing and pain: valuation. At its current price, VOO does not track a market priced like it did in 2008, 2020, or 2022. It tracks the second-most-expensive U.S. equity market in roughly 150 years.

As of late July, the Shiller CAPE ratio - the cyclically adjusted price-to-earnings metric that smooths ten years of inflation-adjusted earnings to strip out boom-and-bust noise - sits at 40.5. The only time this measure has been higher was at the peak of the dot-com bubble in December 1999, when it touched 44.2. For context, the long-run average over 150 years is approximately 17. Today's reading is 2.3 times that average. The CAPE does not predict timing. It tells you expected long-run real returns, and at 40.5, it implies roughly 2.5% annual real return over the next decade, versus the historical norm of closer to 6.7%.

The structural consequence is that the next bear market correction, when it arrives, will have far less valuation cushion to absorb the fall. Every previous CAPE reading above 30 has eventually been followed by a major, often multi-year decline: 38 at the start of the 2022 bear market (which delivered a 25.4% drawdown), 44.2 before the dot-com crash (a 49.1% decline), 30 before the 1929 crash (an 89% collapse in the Dow). Saying VOO has never failed is like saying a car has never failed to brake - which is true, until you're going 180 miles per hour on a curve.

The equally-weighted S&P 500 has outperformed the cap-weighted version by more than 7.3% this year - the first time since 2009 the smaller companies in the index have beaten the mega-caps that dominate VOO. Goldman Sachs strategist Peter Oppenheimer flagged this rotation as a direct consequence of Big Tech's collapsing free cash flow yield relative to the broader market. Meta raised its 2026 capital expenditure target to $135 billion to $145 billion and declined to provide 2027 guidance, with CFO Susan Li calling infrastructure planning "highly dynamic." Alphabet raised its full-year capex guidance to $195 billion to $205 billion, with executives signaling a significant increase for 2027. These are the companies that sit at the center of VOO's holdings.

That matters because a bear market entry at extreme valuation is not the same event as one at reasonable valuation. In 2008 and 2020, investors who bought VOO at the trough participated in recoveries where earnings multiples expanded alongside earnings growth. At a CAPE of 40.5, the next recovery would have to come almost entirely from earnings growth with zero - and I mean zero - multiple expansion. In the academic literature, valuation normalization through price falls is the far more common adjustment than through earnings surges.

The second structural blind spot in the "VOO has never failed" narrative is income. VOO carries a trailing dividend yield of 1.04%. In a bear market where capital appreciation is not available, that dividend is essentially a rounding error. It does not provide a meaningful income cushion while you wait out a multi-year drawdown. Compare that to the Schwab U.S. Dividend Equity ETF (SCHD), which yields 3.12% and has delivered 22.3% year-to-date versus VOO's 12.3%. SCHD is not a perfect bear-market hedge - it still falls when equities fall - but its holdings are screened for sustained dividend history, payout discipline, and free cash flow coverage. In a prolonged downturn, those filters matter.

Now, I want to be precise about the counterargument, because it's real. The S&P 500 has indeed always recovered. The question is not whether it will come back. The question is whether an investor who buys VOO at a CAPE of 40.5 - the second-highest in recorded history - is positioning for a rational expected return or betting that earnings growth will somehow stay exceptional long enough to justify a valuation that the market has never sustained outside of a bubble. Ed Yardeni dismisses the dot-com comparison by arguing today's rally is driven by "fabulous earnings momentum" rather than fear of missing out. But earnings momentum cannot overcome a 2.3-times historical-average valuation unless those earnings compound at rates the S&P 500 has never achieved over a full decade.

The energy supply stress running through 2026 adds another layer. The ongoing Strait of Hormuz disruption has pushed oil backwardation into a 60% scarcity premium - the amount by which spot prices exceed historical baseline - and if energy costs remain elevated, inflation stays above the Fed's 2% target, and rates move higher, it is high-multiple growth stocks at the core of VOO that face the steepest multiple compression. Bank of America's year-end S&P 500 target of 7,100 is below the recent high of 7,621, and the bank notes the market is more expensive ahead of a first rate hike than at any point since the 1999-2000 tightening cycle, except for that cycle itself.

That being the case, the "buy VOO and wait" thesis is not wrong in the abstract - it's wrong at this specific price. The correct allocation move is not to abandon broad-market equity exposure. It's to recognize that the S&P 500 at a CAPE of 40.5 is not a defensive position; it's the frothiest part of the market. A bear-market portfolio does not consist of the asset you're trying to protect against. It consists of diversified positions with different payoff profiles: dividend-screened value funds like SCHD with 3.12% yield and proven resilience, cash to deploy when valuations normalize, and exposure to asset classes - gold, international value, commodities - that benefit from the same inflation and dollar dynamics that pressure overvalued domestic equities.

For investors who want a single-answer defense against a bear market, VOO at its current valuation is not it. In my opinion, the false narrative that the S&P 500 ETF is a catch-all safety net obscures the structural reality that it is, right now, the second-most-expensive basket of stocks in 150 years. That does not mean it will crash tomorrow. It means the margin of safety is not on the investor's side. And in a bear market, the margin of safety is the only thing that matters.