Buying stocks when they are this expensive has led to low returns in the future

The S&P 500's price-to-earnings ratio — one of the most widely used valuation metrics — is sitting at 21.5 on a GAAP basis, well within its historical top quintile.

But with the S&P 500's absolute valuation being so high, investors should be more cautious moving forward, Ned Davis says.Stocks recently notched all-time highs and with the Federal Reserve likely cutting rates later this month, the rally could keep going. But buying stocks when they are this expensive has historically led to lower future returns, data compiled by Ned Davis Research shows.'s price-to-earnings ratio — one of the most widely used valuation metrics — is sitting at 21.

"Absolute valuations have done a better job than relative ones of identifying stocks as cheap or expensive in the long run," Ed Clissold, chief U.S. strategist at Ned Davis Research Group, wrote in a note. has fallen nearly 60 basis points in the past six months . The S&P 500 is up more than 14% in that time.

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