The Market Is Lying to You

Oil Is Over $100. The Strait Is Closed. The U.S. Just Blockaded Iran. And the S&P 500 Is Back to Where It Started.

A reader wrote yesterday, confused. The gist: there’s a war on, the Strait of Hormuz is closed, oil is above $100 — and the stock market just shrugs it all off. What gives?

It’s a fair question. And I think a lot of people are asking some version of it right now. So let’s look at something.

There’s a measure called the CAPE — the cyclically adjusted price-to-earnings ratio. Unlike the regular P/E, which just looks at the last twelve months of earnings, the CAPE smooths out a full decade of data to cut through the noise. It’s the closest thing we have to a reliable gauge of whether the stock market is cheap or expensive relative to what companies actually earn over time.

Right now, the CAPE is sitting at almost 40. Take a look.

That’s the second-highest reading this measure has ever recorded. The only time in history it was higher? The dot-com peak of 2000 — right before the Nasdaq lost nearly 80% of its value. And yes — amazingly — today’s number is significantly higher than it was on the eve of the 1929 crash.

So when we say the mainstream stock market has become divorced from reality — this is what we mean.

A Lopsided House of Cards

Now, you might be thinking: “Markets have been expensive before and done just fine.” And sure — even after the dot-com crash, the market eventually recovered. But here’s the thing — this market is not 2000. The valuation looks similar on paper. Underneath, the structure is far more fragile.

Think about it this way. The top ten stocks in the S&P 500 now account for roughly 40% of the entire index. At the dot-com peak, that number was around 25%. The index has never been this top-heavy.

So when you buy “the S&P 500” today, you’re not buying 500 companies. You’re making a very concentrated bet on a handful of names. The diversification you think you’re getting is largely an illusion.

And you know what’s holding that handful together?

One thing: the bet that AI spending pays off. Tech companies are on track to pour over $700 billion into AI infrastructure this year. And that’s precisely the problem — because so far, there’s almost nothing on the other side of the ledger. American consumers spend about $12 billion a year on AI services. $700 billion going in. $12 billion coming back. That gap — between what’s being spent and what’s being earned — is the exact same dynamic that played out during the fiber optic buildout of the late 1990s. Telecom companies spent hundreds of billions laying cable for an internet economy that was real, but that took far longer to monetize than anyone expected. The infrastructure survived. The investors who bought the peak did not.

Now, none of this means AI is fake — or that it won’t eventually reshape entire industries. It probably will. But “eventually” is doing a lot of heavy lifting when you’re spending $700 billion a year on a bet that hasn’t come close to paying for itself yet. The late 1990s internet was real too. The money just showed up a decade before the revenue did.

The Fuse Is Lit

So when someone asks me why the S&P 500 hasn’t cracked yet — my answer is: give it time. We’ve seen this movie before. The S&P 500 peaked in October 2007 and spent months drifting sideways while the subprime market was already on fire underneath it. Everything looked fine — until it didn’t. By the time equities caught up to reality, Lehman was gone and the index had been cut in half.

And this time, the fuse is lit and getting shorter. We are living through the largest disruption to global oil supply since the 1970s — and as of this past weekend, the U.S. didn't resolve it. It escalated it, announcing a full naval blockade of Iran's ports after peace talks collapsed in Pakistan. As of this writing, the strait remains closed. Over 400 tankers are still anchored. And in the physical market — where actual barrels change hands — dated Brent hit $144 last week. That was before the blockade.

That kind of oil shock is a tax on every business and every consumer in the economy. But it doesn’t show up in the stock market the week it happens. It shows up in the earnings calls three to six months later, when companies start guiding down and margins start compressing. The Hormuz situation is barely seven weeks old. The damage hasn’t even arrived in the data yet.

The market will figure this out. It always does. Just probably not when you expect it to.