Close. It's Shiller's CAPE ratio (currently at 33.24, with a historical mean of 16.88). Shiller's work isn't the end all be all, but it's most definitely not insignificant. The CAPE smooths out the PE by taking 10yr averages that cover full cycles. Whether or not high PE ratios are here to stay due to changes in how earnings are reported is another debate that involves more than the scope of the overall point.
I'm not advocating that everyone take his 401k to the sidelines, and I didn't post the original chart as a market timing indicator. I'm simply stating that future market expectations should be tempered based on where we are currently. For a number of reasons, whether it's valuations or a yield curve nearing inversion, or pick your poison on any number of metrics, we are at a point where the next 10+ years of expected market returns (especially for the S&P 500 Index huggers) could easily look very meh to outright bleak. Again, this isn't a prediction, because nobody knows where the market will be a year from now. I'm just saying buy into this market with eyes wide open. If you're 33 you haven't personally experienced a market crash. I can't tell you how many people I watched talk bravado on the way up and their actions ended in capitulation by the end of 2008 or 1st quarter 2009. Human emotion is a real thing and it absolutely wrecked a lot of folks who once swore that they wouldn't succumb to it. The flip side of that being that, yes, a lot people did ride it out. If you can close your eyes and ride the ride, then jump in. Just be sure that you can. It's a long slog back after a big market correction. I think it's awesome that you're paying attention to your investments and wanting to understand how best to plan for your future...most people don't get to that place until it's too late. Just know that buying into this current market with 90%+ allocated to equities is going to test a lot of stomachs on the next trip down. No one's gonna be talking about 0.07% vs. 0.15% expense ratios when it happens.
I think wanting to diversify some of your US market exposure away from the S&P 500 is a good idea. If you're committed to riding the ride, reducing your asset allocation correlation plays a big part in portfolio returns. It's way more important than which fund company you choose or picking a fund based on ER. The S&P 500 index is cap-weighted, so while Apple, Microsoft, Amazon, and Google individually make up 1/500th of the companies in the S&P 500, they each account for a 3-4% allocation weighting in the index. As those companies go, so goes the index.
The S&P has had a really strong run; however, it had a negative annualized return during the 2000s while small and midcaps annualized 6%+ (as did the US bond index) during that time. I'd say it's worth having at least 1/4 (and probably more) of your US equity exposure in small/mid cap funds, IMO.
Overall, I agree with this sentiment. It doesn't pay for the average investor to avoid the market and try to time it. Unfortunately, backward looking analysis doesn't keep people from making really bad decisions with their money in times of exuberance or chaos.