I have been worried about stock market valuations for quite some time. So much so that I predicted my own layoff back in September of 2023 not because I am clairvoyant but because I’m old and have lived through enough recessions and stock market shocks that I ought to know better by now. I was 20 months early but my firm did a few rounds of layoffs a full 8 months before I was let go and just happened to be the latest round.

I still believe we are long overdue for a significant market correction that may be brutal enough that it will cause lots of pain and problems for people. To that end, I decided to get AI’s view on how much the market is overvalue by looking at three ETFs: SPY, QQQ and IWM.

Here’s how the conversation:

SPY has a PE of 30.83 and is trading at $680.59, what should SPY value be if the PE were the normal 16?

To estimate SPY’s price if its P/E reverted to 16, we assume earnings stay the same and only the valuation multiple changes.

Step-by-step

• Current price = $680.59
• Current P/E = 30.83
• Target “normal” P/E = 16

Since$$\text{Price} \propto \text{P/E} \quad (\text{if earnings are constant})$$Price∝P/E(if earnings are constant)$$\text{Implied Price} = 680.59 \times \frac{16}{30.83}$$Implied Price=680.59×30.8316​

Result

$$\boxed{\approx \$353.21}$$≈$353.21​

Interpretation

• That implies a ~48% decline from the current price.
• This is a valuation-only adjustment — it does not assume:
  • earnings growth or decline
  • changes in interest rates
  • changes in index composition

If you want, I can:

• adjust for earnings growth scenarios
• compare against historical SPY drawdowns
• show what price corresponds to other P/E levels (20, 18, etc.)

adjust for earnings growth scenarios

Let’s layer earnings growth into the valuation math.

Baseline (today)

• Price = $680.59
• Current P/E = 30.83
• ⇒ Current earnings per share (E):

$$E = \frac{680.59}{30.83} \approx 22.07$$E=30.83680.59​≈22.07

We’ll project earnings forward, then apply a normalized P/E of 16.

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Scenario Table (1–5 years)

Assumptions

• Earnings grow at a constant annual rate
• Valuation compresses to P/E = 16

Earnings Growth	Years	Future Earnings	Implied SPY Price
0%	1	22.07	$353
5%	1	23.17	$371
10%	1	24.28	$388
5%	3	25.55	$409
10%	3	29.38	$470
5%	5	28.17	$451
10%	5	35.54	$569

(Price = Earnings × 16)

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What this tells us

Key insight

Even strong earnings growth does not fully offset multiple compression unless:

• growth is high (≈10%), and
• sustained for many years

Reality check

• 5% growth + P/E normalization → SPY still 30–35% below today
• 10% growth for 5 years → still ~16% below today
• To justify $680+ at P/E 16, earnings would need to reach:

$$680.59 / 16 \approx 42.5 \quad (\sim 93\% growth)$$680.59/16≈42.5(∼93%growth)

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Big-picture framing

• Today’s price assumes either:
  • permanently higher P/E norms, or
  • very strong, sustained earnings growth, or
  • falling rates supporting high multiples
• Historically, markets tend to normalize through some combination of:
  • time (earnings catch up)
  • price (drawdowns)
  • inflation (nominal earnings rise)

If you want, I can:

• run inflation-adjusted scenarios
• model gradual P/E compression instead of instant
• compare this setup to 2000 or 2021-style market regimes

Let do the same analysis for IWM with a pe of 18.18 and current price of $250.79 and QQQ with a pe of 33.77 and price of $617.

Below is the same earnings-growth + P/E normalization analysis applied to IWM and QQQ, using the same target “normal” P/E = 16 and assuming earnings grow while valuation compresses.

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IWM (Russell 2000 ETF)

Current metrics

• Price = $250.79
• P/E = 18.18
• Current earnings (E):

$$E = \frac{250.79}{18.18} \approx 13.79$$E=18.18250.79​≈13.79

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IWM — Earnings Growth Scenarios (Target P/E = 16)

Earnings Growth	Years	Future Earnings	Implied Price
0%	1	13.79	$220.6
5%	1	14.48	$231.7
10%	1	15.17	$242.7
5%	3	15.96	$255.4
10%	3	18.36	$293.8
5%	5	17.61	$281.8
10%	5	22.21	$355.4

Interpretation (IWM)

• IWM is much closer to fair value than SPY or QQQ.
• 5% growth for ~3 years fully offsets multiple compression.
• Small caps historically benefit more if rates fall or growth broadens.

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QQQ (Nasdaq 100 ETF)

Current metrics

• Price = $617.00
• P/E = 33.77
• Current earnings (E):

$$E = \frac{617}{33.77} \approx 18.27$$E=33.77617​≈18.27

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QQQ — Earnings Growth Scenarios (Target P/E = 16)

Earnings Growth	Years	Future Earnings	Implied Price
0%	1	18.27	$292.3
5%	1	19.18	$306.9
10%	1	20.10	$321.6
5%	3	21.15	$338.4
10%	3	24.30	$388.8
5%	5	23.33	$373.3
10%	5	29.45	$471.2

Interpretation (QQQ)

• QQQ is most sensitive to P/E compression
• Even 10% earnings growth for 5 years leaves it ~24% below today
• Current price assumes:
  • structurally higher multiples or
  • exceptional long-term earnings growth or
  • persistently low discount rates

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Side-by-Side Takeaways

ETF	Downside if P/E → 16 (no growth)	Growth Needed to “Grow into” Price
SPY	~-48%	~90% total earnings growth
QQQ	~-53%	~110% total earnings growth
IWM	~-12%	~20–25% total earnings growth

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Big picture

• QQQ = growth perfection priced in
• SPY = expensive but diversified
• IWM = closest to historical valuation norms

My Thoughts

To bring this full circle, I submit that I’ve been in IWM for a while now, you can read those posts, here, here, here and here to name a few posts. I have very minimal things in SPY and QQQ except for a few net collar holdings. I am still very worried about a big correction so I will stay on my current course but I am looking to position in to QQQ and SPY when the time and price is right so I’m building a cash secured put portfolio to do this when the time comes. Heck, maybe I’ll create a new app 😉

Share The Wealth

Do you think this market is ripe for a correction? Let me know in the comments below.