The forward 12-month P/E ratio of the S&P 500 is now at 22x, which is 16% higher than the 10-year average of 18.9x. It sounds quite high, but honestly, it hasn't reached the crazy peak of 23.5x seen in 2020-2021. Later, in 2022, the Federal Reserve started raising interest rates, causing the index to dip to around 18x, but then it started climbing again after 2023.

What does this valuation number indicate? The market is betting on significant future earnings growth. Wall Street analysts forecast that by 2025, the S&P 500 earnings per share could reach $268, and by 2026, it could surge to $304, which translates to an annual growth rate of about 13%. Sounds good, but where's the problem? This growth largely depends on the tech sector to carry the load.

Looking at the trailing P/E ratio of the tech sector, it's 25.68x. This means the market has already priced in the future growth story, with expectations fully baked in.

There are two pitfalls to watch out for here. First: what if the growth rate of the tech sector suddenly stalls, or AI commercialization doesn't go as smoothly? Then, the 22x valuation could become a castle in the air, potentially reverting to the historical average of 18x. Doing the math, that would imply an 18% decline. Second: history shows that whenever the P/E exceeds 22x, a significant correction usually follows. This was the case during the dot-com bubble, and the rate hike cycle after 2021 also confirmed this pattern.

So, most investors are now saying: be cautious at this level, and definitely avoid chasing highs.