The market’s favorite reality check is back
The Rule of 20 is one of those old-school valuation yardsticks that sounds like it was invented by a guy with a pocket protector, but it still gets attention when stocks start looking frothy. In this case, the setup is pretty simple: take the S&P 500’s P/E ratio, add inflation, and see how comfy you feel about the result.
The math says: not exactly cheap
Right now, the article says the S&P 500 is trading at about 26x earnings, while inflation is running at 3.4%. Put those together and you get an R20 score near 30, which is above the historical comfort zone. Translation: the market is asking investors to pay up, and then some.
- A higher Rule of 20 score generally means valuations are stretched.
- A near-30 reading suggests the market is trading well above classic “fair value” territory.
- That doesn’t mean a crash is around the corner — but it does mean future gains may need more help from earnings growth than from multiple expansion.
Why investors should care
This matters because valuation math tends to become more important when the easy money already got spent. If the Rule of 20 regains relevance by 2027, as the piece suggests, it could become a useful speed bump for anyone assuming today’s market multiples are the new normal.
Big picture: when the market is expensive, the burden shifts from “will people pay more?” to “can companies actually earn more?” And that’s a much less fun party question.