On Monday, both the Nasdaq Composite and the S&P 500 closed within one-hundredth of 1% of Friday’s ending levels. While the lack of net movement from the market was largely dismissed as stocks taking a well-deserved break, it’s possible the lackluster effort was much more than just a slow day.

More plausibly, the recent run-up has exacerbated a problem — valuations have officially reached alarming levels … and investors know it.

From here, not only do stocks have limited near-term technical upside, but they might be crimped by fundamentals too.

The S&P 500 Hits a Valuation Wall

Since May 15, the S&P 500 has advanced nearly 5%. The Nasdaq has done even better, with a 7.3% run. The Russell 2000 has done better still, rallying 8.1% for the same period and sidestepping a meltdown that many were sure would drag the rest of the market down with it.

While the market’s gain itself was and is encouraging, even more encouraging is how the outsized performance of small caps and the tech-heavy Nasdaq (compared to the Dow Jones Industrial Average or the S&P 500) implies a risk-on mind-set … one of the needed qualities of any long-lasting rally. And truth be told, the bigger-picture undertow really is bullish.

But after nearly 32 months of gains without suffering a correction of 10% or more — on top of a very bullish five-week stretch — the near-term mania is finally colliding with long-term reality.

As of Monday’s close of 1962.61, the S&P 500 is trading at a trailing price-to-earnings ratio of 18.02. It’s an uncomfortably high valuation — the highest we’ve seen since Q4 2009, when we were stall in the throes of a brutal recession. Prior to that, the last time stocks were valued at P/E’s of more than 18 was in mid-2004, also when we were digging our way out of a recession.

Point being, we’re not just a tad above the normal trailing P/E level of 15.5. We’re alarmingly above the norm.

Also as of Monday’s close, the S&P 500 is valued at a forward-looking P/E ratio of 15.8 (starting with Q2’s projected income). That’s more than a tad beyond the S&P 500’s 35-year average forward-looking average P/E ratio of 13. Even the more relevant 10-year average forward-looking P/E measure of 14.1 has been left in the dust.

But the growth that will justify these valuations is in the cards, right?

Never say never, but the growth needed to reach the projected P/E level isn’t chump change. Just to remain at that 15.8 forward P/E, the S&P 500 will need to crank up its earnings to the tune of 14.2% over the coming four quarters, beginning with Q2’s results.

That’s a tall order considering the market’s earnings haven’t grown at a pace that strong since 2011 when we were still waking up from the recession’s nightmare.

If companies struggled to turn the heat up on growth in 2012 and 2013 when the Federal Reserve was handing out cheap money like it was candy and inflation never reared its ugly head, how can we possibly think companies are in a better position for growth now than we were a year or two ago? Inflation is finally starting to swell, and Janet Yellen has confirmed that the Fed’s bond-buyback efforts are going to entirely go away by the end of the year.

If anything, the road ahead is going to get tougher to navigate.

Right on Cue

To be clear, this isn’t to say we’re poised to make our way into a new bear market. Even if stocks are overvalued relative to trailing or projected earnings, income is still on the rise, and stocks will broadly rise with earnings … in the long run.

In the short run, however, investors are finally starting to see the market’s liabilities right as a couple of the major indices are at key make-or-break levels.

For the S&P 500, that make-or-break level is the nearby 2000 mark. Big, round numbers tend to be major psychological inflection points for investors (although it often requires a contextual catalyst like frothy valuations for investors to notice an index is approaching a level ending in a couple of zeros). Although not quite there yet, Monday’s close of 1962.62 is getting close, and might well be close enough to say the sheer worry surrounding the 2000 mark is already bearing down on stocks.

For the Nasdaq Composite, that big line in the sand is 4372. Not only is that where the index has struggled the past two trading days, but it’s also suspiciously where the Nasdaq topped out in early March. Whether real or only perceived, the technical ceiling at that level is becoming trouble at a time when stocks are vulnerable.

Bottom Line

The 7% rally we’ve seen from the Nasdaq over the past five weeks is impressive, but perhaps overdone. Even more concerning is that it has happened at a point in the year that should be anything but bullish.

Remember the “sell in May and go away” axiom? The slowest six months of the year that begins in May results in, on average, a 1.3% gain for the entire six-month stretch. Since the beginning of May this year, the S&P 500 is already up 4.1%.

Either 2014 is going to be an amazingly bullish year (which doesn’t appear to be in the long-term cards), or we’re on the cusp of a much-needed normalizing.