The Stock Market Flashed This Warning Only Once Before. What Comes Next Isn’t Pretty
The S&P 500's Shiller P/E ratio has reached 40.90, a historically high level that was only surpassed during the dot-com bubble in 1999. When the CAPE ratio has been above 35, subsequent 10-year annualized returns have averaged between 0% and 3%.
The S&P 500 has returned over 26% in the past 12 months, driven by artificial intelligence enthusiasm and mega-cap technology stocks. However, the Shiller P/E ratio, or CAPE, currently stands at 40.90, a level that is historically expensive and was only surpassed in November 1999 during the dot-com bubble. The CAPE ratio uses 10 years of inflation-adjusted earnings to smooth out economic booms and recessions. Historically, when the CAPE ratio has been above 35, subsequent 10-year annualized returns have averaged between 0% and 3%. Companies like Microsoft, Nvidia, and Alphabet generate real profits, differing from the dot-com era. The high valuations may predict lower long-term returns, but do not necessarily indicate a crash is imminent.
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