CAPE

Plenty_Fondant_951

Shiller CAPE ratio higher than it was before the great depression? Meh, that shit only matters for nerds. This market is and will continue to chug along on snorted faery dust

reupped

The current CAPE (p/e conventional measure of market priciness) can be misleading because the top 10 stocks dominate it more than any previous period, while the median stock's PE is much more reasonable.

arkansaslax

Fun fact the 1929 crash and dotcom bubble both had the same kind of “this time it’s different. It can literally only go up! Leverage to the tits because it’s free gains!” narrative. The irrational exuberance is a pretty good sign that’s it’s already a bubble. Who knows when it’ll decline but the CAPE ratio predicts negative real returns over the next decade.

churningaccount

No one can predict the future. That being said, if the next decade (2026-2036) ends with positive real returns for the S&P500, it would actually be the first time in history that that happened at the current market CAPE. However, historically unprecedented things happen all the time. We only have about 150 years of market data, of which only really the data post-gold standard is relevant (1960s onward). Do that’s not a lot of data when you think about it, and doesn’t cross the threshold for statistical significance very often during analysis. We are also at an unprecedented time for the percentage of market participation among the population, as well as how heavily the market is relied upon for retirements. It’s totally possible that we are just moving into an era where the equity risk premium is higher going forward. The best thing one can do going forward, I think, is to try not to make predictions with incomplete information. Invest according to your risk tolerance, and don’t try to time the market. In general, the more you just do something boring and follow the majority, the better protection you’ll probably have against adverse events, given that we’ll “all be in it together” at that point.

Beneficial-Ad-7771

I agree that valuations matter, but I also think today's market is structurally different from 2000. The biggest differences are passive investing, ETFs, options markets, and overall liquidity. There's also significantly more global capital flowing into U.S. equities than there was 25 years ago. Those factors have fundamentally changed how capital moves through the market. I still think we'll get drawdowns from time to time, and some sectors will absolutely get ahead of themselves. We've already seen plenty of individual stocks fall 30-70%. But if a company continues to grow revenue, earnings, and free cash flow, I think it's less likely we'll see the type of prolonged 80-95% collapse that happened across so many quality names after the dot-com bubble. Another difference is the quality of companies. During the dot com era, a lot of businesses were essentially IPO'ing with little more than an idea and a website. Today, many companies are going public with billions in revenue, established customer bases, and real cash generation. The regulatory environment is also much stricter than it was back then. As for the Shiller CAPE, I'm not convinced comparing today's market directly to the last 150 years is apples to apples. The index is much more heavily weighted toward high-margin, asset-light technology companies with global reach and much higher returns on capital than the industrial businesses that dominated decades ago. I'd actually expect the market to trade at a structurally higher multiple because the composition of the market has changed. That doesn't mean valuations can't compress or that we're immune to corrections. I just think using 2000 as the base case ignores how much the market structure and the quality of public companies have evolved.

CrispyTheory

i honestly agree w u, imo this is way different from Pets.com burning millions to ship dog food that comparison is fair. But real revenue and bubble valuations can coexist. Cisco, Intel, Microsoft were all making serious money in 2000. Still crashed 80-95%. The problem was never the business it was the price paid for it. Shiller CAPE is at 41 right now. Historical average is 17. Only time it was higher in 155 years was right before dot com. Buffett Indicator at 234% higher than the 2000 peak. Shiller himself says expected returns next 10 years are around 1.5% annually. And it’s not just 1-2 signals. 9-11 of the historically reliable bubble indicators are triggered simultaneously more than 2000 and 2008 combined. as Carlota Perez documented this pattern every major tech revolution creates a real bubble phase even when the technology is legitimate. Railroad bubble had real trains. Still crashed hard.

ZYHUA

* **CSCO ATH after 26 years.** * **CAPE near 40 again.** * **Buffett Indicator: 219%.** * **Margin debt: $1.42T.** * **Top 10 = 36% of S&P.** * **Diversification is AI beta.** * **AI capex +74% YoY.** * **$45B per data-center GW.** * **Semis had “best quarter ever.”** * **+1,800% profit, stock down.**

Competitive_Pop_3286

What you’re overlooking is that there are more opportune times to purchase. If I potentially have an opportunity to buy indices at lower valuations than now I will have a lower cost basis. ATH and maximum CAPE are flashing caution.

cyphr0n

Schiller’s CAPE was based on Graham and Dodd’s average earnings over multiple years.

Remarkable_Cat_8696

CAPE was designed in 1988 actually.

cyphr0n

Yes. CAPE was designed in the 1930’s around the old slower industries. Nowadays, tech companies’ hyper-growth (and yes, hyper growth companies with no to low earnings) would make Graham and Dodd’s heads spin. CAPE is an old relic that can’t be used reliably for today’s tech industries. The difference between a 10-15% growth company and a 25-40% is so vast that it’s not even worth comparing.

Wild_Space

\>Anybody else follow the Shiller P/E ratio (CAPE ratio) and/or the Buffett Indicator, and give either metric much credence? No

icydragon_12

This chart tells you: if valuations are high, they're less likely to increase. Of course, earnings continue to grow during this time and accrue to shareholders, but valuation multiples essentially hit a limit, reducing the upside from multiple expansion. Can you do anything with that? Most people consider taking risk off the table. This has been tested. Back testing involves creating a strategy to use a metric (eg CAPE) as a signal to improve/generate excess returns. Although CAPE tells you that high valuations reduce expected long-run returns; **it does not tell you when the market will stop getting more expensive.** Which is why it fails backtest. In [AQR's published research](https://www.aqr.com/-/media/AQR/Documents/Insights/White-Papers/Market-Timing-Sin-a-Little.pdf) (TABLE 2) they looked at Buy and hold: annual excess return 5.5% sharpe 0.37 CAPE: annual excess return 5.4% sharpe 0.37 I also ran this with various deep learning algorithms and found similar results. Main strategy tested: changing asset allocation (stocks vs bonds).

xcrunner2414

So... the data plot at the following URL is useless, uninformative, garbage? [https://www.lynalden.com/wp-content/uploads/CAPE-Returns.jpg](https://www.lynalden.com/wp-content/uploads/CAPE-Returns.jpg)

greenpride32

Perhaps I've been in the markets longer than you - but I can recall first hearing the CAPE/Shiller warning signs back in 2016-17 time frame. The story built up momentum because along the same timeline was BRK/Buffet building their cash pile larger and larger and larger. Of cours they are value investor and tech adverse. Well fast forward a decade later and I'd hate to be the person who pulled out early.

D74248

> I'd like to be aggressive with the majority of the inherited cash. Historically, 10 year stock market returns starting with CAPE over 30 have been poor. It is currently 41. The last time that it was over 40 was just before the dot-com bubble burst. Realistically you only have a 10 year investment horizon, since that is when your fiduciary obligations end and people will look at what you did. And managing other family members money is always a minefield.

D74248

> They’ll have a lot in 10 years. Maybe 2.5x. Or maybe not. S&P 500 CAPE is at 41.6 -- median is 16.1. Price to book is at 5.92 -- median is 2.91. And so on. The OP might be wise to invest conservatively if only because he will be judged on 10 years of performance, immediately after which his children will be looking at education expenses and then getting started int life; not some decades in the future retirement.

Beautiful-Noise-2847

I'd refer you to the most recent Bank of England stability report, page 39 "Developments in global vulnerabilities and financial markets". Personally I would not be getting into the market at these levels, but I am much older than you, it just depends on your tolerance for risk and how likely you are to hold through a major crash. If you have 20 years until you need the money and won't panic if it drops 50-70% and sell at the bottom it may be fine as historically it eventually recovers. If you are going panic sell if it drops, stay out and wait for the next dot com or 2008 moment and buy then, again history shows us there is a substantial collapse in the market every 8-20 years. The report below shows leading economists think the market is possibly overvalued at these levels and a large correction is a real possibility. [https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2025/financial-stability-report-december-2025.pdf](https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2025/financial-stability-report-december-2025.pdf) Highlights "In the FPC’s judgement, many risky asset valuations remain materially stretched. This heightens the risk of a sharp correction." "Equity valuations on some measures (for example the excess cyclically adjusted price-to-earnings (CAPE) yield) look stretched relative to historical levels across jurisdictions, especially in the US where, on some measures, they are close to levels not seen since the dot-com bubble" "Markets do not appear to be fully reflecting the persistent material uncertainty in the global economic and policy environment, and the potential for adverse outcomes. ...... The risk of a sharp correction remains high. If participants were to reassess their outlook abruptly this could cause asset prices to realign to the prevailing high level of uncertainty" "The risk of a sharp correction sits against a backdrop of rising public debt-to-GDP ratios in many advanced economies, potentially constraining their governments’ capacity to respond to future shocks." "These prices are exposed to a sharp correction if the prospects for AI development, or for the companies to monetise and generate profits from the use of AI, are revised. Given the concentration of the market, investors exposed to the aggregate index will face a high level of pass through from any sharp correction in AI-focused firms." "By some industry estimates, AI infrastructure spending over the next five years could exceed $5 trillion US dollars. ...... Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks."

old_fruity

so you saying this valuation makes less statistical sense than you personally existing? your parents meeting, fucking at the exact right time, that specific sperm winning, repeated for every ancestor you've ever had, is more probable than current CAPE ratios? the entire chain of events that produced your worthless ass is a more reasonable outcome than this market? and people are still buying the dip??

Gullible_Ad3785

"If we correct for the earnings bubble, the current CAPE would be 67.6x or 4.6 standard deviations above trend, a bubble that surpasses anything ever seen in US history by an extreme margin. If valuations followed a normal distribution (which they don’t, so don’t take this literally), this would happen in 0.00019% of months or once every 43,432 years." Japan or beyond territory boyos

PermaWatchingDXY_67

wrong numbers. The group's down \~12% from its Oct 2025 peak, not the 16-32% per name figures shown, those look lifted from the deeper March selloff. "$5T lost" is closer to $2T off peak tbh. Real point stands \~33% index weight, CAPE near record...

Agitated_Reason4504

Lots of people calling gold risky at these prices, but completely swerving the S&P 500 at 40+ Shiller CAPE ratio lol

LegitosaurusRex

The thing is you’re paying a lot more than the risk premium for your increased returns, so you’re no longer along the efficient frontier. Tbf I did dump my IRA into TQQQ in 2022 since it seemed like everything was undervalued, but now I’ll stick with my VTI and VXUS; CAPE is at record levels and AI looks like a bubble, so the last thing I want to do is lever up.

Delicious_Put_5857

S&P 500 CAPE RATIO HITS 41, SECOND-HIGHEST LEVEL ON RECORD, TRAILING ONLY DOT-COM BUBBLE PEAK quick buy some fake rocket launcher companies and shit

Alone_Owl8485

Price to sales, CAPE.

throwaway-4748329472

It’s all hyper dependent on the individual and their circumstances. Ignoring PE ratios and CAPE and always putting new cash flow into a broad index will work over a long 20+ year time horizon. Life is not the simple, kids happen, people get sick, homes have emergencies. Some people don’t want to have to go through that and watch their porfolio be cut in half at the same time. Other asset classes smooth that volatility. You’re absolutely allowed to change your allocation based on your life situation. At current prices it’s almost guaranteed we will experience a 20%+ drawdown year in equities somewhere in the next 10 years. It’s also almost guaranteed that your CAGR in VTI over 20 years will not be lower than 7%. Not everyone is built to have that 20 year vision when just lost half your net worth. From a purely mathematical standpoint for terminal wealth, you’re right. But also math studies have also shown it’s even MORE efficient to use 2x leverage, over the course of 20+ years you will outgrow the interest you paid for the leverage. But now you have to stomach potentially 70-80% drawdowns, but throughout the entire history of the SP500 it has produced outsized gains vs just SP500 over every 20 year period. Why don’t you do that? Probably because it requires an insane amount of risk tolerance That being said. I agree VTI (or VT) and chill is the strategy 80%+ of people should be using

InevitableAd2436

Comparing the CAPE of asset light compounding machines to historically low PE industrials is certainly a choice.

VotedOut

Well 1999/2000 was the last time that S&P 500 hit 2 standard deviations over-valued compared to historical trend or average (i.e. - crossed the red dotted line) by [CAPE Ratio](https://imgur.com/a/Xvsaos3), [Buffett Indicator](https://i.imgur.com/fN3g97M.jpeg), [Mean Reversion model](https://imgur.com/a/58OwAKs), [Interest Rate model](https://imgur.com/a/iT66lyc), and the [Aggregate Market Value Index Score](https://i.imgur.com/adh7AgO.jpeg) (Source of data: currentmarketvaluation.com) And what do you know, the same conditions all are true right now too! So I dunno... should I say we're not in a dot-com style bubble just because the Knicks beat the Spurs where correlation clearly isn't causation? Or should I say that we ARE in a dot-com style bubble because of the excessive 2-standard deviations of over-valuation where correlation likely IS causation? Or maybe if we're into basing it on superstition... perhaps we are in a dotcom bubble just because the Knicks and Spurs matched up with each other in the finals in the first place, which last happened in 1999, right? (I don't follow basketball)

Aggressive-Donkey-10

sp500 CAPE PE = 43, near all time high in human history don't invest all at once, as sp500 unlikely to go up 20-30% this next 12 months, more likely to drop a lot. maybe 50k now and 50k every 6 months for next 4 years, keep the cash in SGOV at 3.55%

marima33

Look at these actual holdings, no divs reinvested. Equal Wt. S&P RSP 2003 up 500%. S&P SPY 2004 up 590% Small Cap VB 2008 up 540% Large Cap Growth IWF 2008 up 780% In this long period every one of these has looked stupid, and every one has looked brilliant. In this environment, I'd first be diversified and then go overweight with RSP. The CAPE ration doesn't shout, but it also doesn't lie.

harrison_wintergreen

the arguments against large cap growth are: - historically, large cap growth one of the worst performing market sectors over the very long term. value tends to perform better, more pronounced with small and mid cap stocks, while growth strategies tend to perform worst. see here: https://indexingonsteroids.com/smallcap-value-charts and here: https://institutional.fidelity.com/app/literature/view?itemCode=9920885&renditionType=PDF - *growth stock* doesn't mean the stock price will grow faster/better than other stocks. it means the company's revenue or profits are growing faster than peers. sometimes these stocks perform well, other times they won't. - Investing performance is cyclical, based in large part on valuations like CAPE ratios. What performs well the last decade often performs poorly in the next decade, because hot stocks get pushed up to where you're paying too much relative to the company's earnings, dividends, etc. I'm old enough to remember when the S&P 500 went flat from 2000 to 2012-13, and almost everything else performed better: small cap US, international, bonds. so I experienced a period of large growth underperformance. see here: https://contrarianoutlook.com/wp-content/uploads/2016/09/SPY-Midcap-Smallcap-20yr-Chart.png or here: https://www.financialsamurai.com/wp-content/uploads/2016/11/long-term-bonds-versus-stock-market.jpg - "VOO and chill" is mostly an online amateur theory, among younger people who don't remember 2000-2010. nearly all professionals in finance and investing recommend a more diversified portfolio. early 2023, Rob Arnott from Research Affiliates was promoting international value stocks https://www.youtube.com/watch?v=YzZuwe0IPEE and last year, international value beat VOO by 20% or more (17% for VOO vs. 46% for IVLU, 40% for FNDE, 43% for FIVLX)

GrokM14232

The 630% number is more striking when you decompose it. Most of the increase from the historical baseline is asset price inflation, not underlying wealth creation. The post-2008 playbook deliberately reflated asset prices for the wealth effect, and it worked. The problem JPMorgan is identifying is that the mechanism overshot. A 20% equity drawdown now contracts household wealth by something like 8-10% of GDP in a single shot, which is why the macro case for caution is less about valuations being high and more about the economy becoming structurally dependent on elevated asset prices staying elevated. The CAPE at 39 and the Buffett indicator above 230% are symptoms of the same process.

GrokM14232

Agree with the framing. The geopolitical premium was never priced in when markets were at highs, so a non-escalation is not actually removing a discount -- it is more that sentiment found a convenient bounce catalyst. The underlying pressure is rate expectations and valuation stretch, both of which are unchanged. Shiller CAPE is still near 38-39 and the Fed path is still uncertain. The market bouncing on a tweet cancellation is less about fundamentals and more about positioning in a thin tape, fwiw.

Karlander19

Doesn’t sound like you e been through a serious downturn before? Although we’ve had a couple real bad days since April ‘25 I am sorry to say my analysis and calculations show that the pending NASDAQ down turn will come to rest somewhere close to 19,000 . The analysis looks at the trends commencing 1979 and looks at mean return based on excessive valuation using a modification in Schiller 10 year CAPE . The important is I do not know over what length of time this downturn will occur but 2006-2010 and 1999-2002 suggest that the upcoming NASDAQ downturn to 19000 will occur over no more than 30-60 days.

thewimsey

>The Shiller CAPE ratio compares the market’s price with ten years of inflation-adjusted earnings. Right now, it suggests the S&P 500 is one of the most expensive markets in modern history. For better investing, substitute "the Oracle at Delphi" for "the Shiller CAPE Index". Shiller CAPE has a terrible track record. It only works in retrospect. In 2013, the ratio was 50% higher than the historical rate, leading people who followed it to predict that returns for the next 10 years would be below average. That was obviously spectacularly wrong. >I am simply waiting for valuations and expectations to reconnect with reality. You list a bunch of data in your OP, but don't include the most relevant piece of data, which is that timing the market has a terrible, horrible, very bad no good track record. >If this is a late-stage bubble, a 35% decline is not impossible. Nothing is impossible. Including an increase of 100% followed by a 35% decline. Or a 35% decline followed by a 70% increase.

Agitated_Reason4504

Dotcom bubble level shiller CAPE right now, I think it’s not to be ignored entirely.

tldamico

Sticky inflation running around 3.8%, surging oil prices due to Middle East conflicts, record-high consumer debt and credit delinquencies. Elevated S&P 500 Shiller CAPE ratio is signaling stretched valuations, and consumer strain dragging down retail sales. Calls it is.

u_spawnTrapd

I think the hardest part of this position is that valuation alone is rarely a useful timing tool. A lot of people were making similar CAPE arguments years ago and missed huge gains while waiting for prices to make sense again. What stands out to me is that you've gone from cautious to 100% out. If you're still a long-term believer in equities, being entirely in cash is a pretty big bet too. You might end up being right on the correction and still wrong on the timing.

arkansaslax

Another fact to consider: CAPE - 42.70

harrison_wintergreen

as someone who was an adult in the 2007-08 meltdown, this advice is unbelievably stupid. especially with the CAPE ratio over 40. this reeks of someone under 40 who has never lived through a bear market and major economic crisis. >Let's consider the worst case scenario and say the entire market drops by 60-70%. that's not the worst-case scenario. 50% market drops happen with some regularity. the worst case scenario is: - 50% market drop or worse AND - getting laid off from your job AND - it's difficult to get hired at the same salary or in the same industry AND - you, spouse or children have chronic health issues AND - you're leveraged to the gills and cash-poor and can't keep up with monthly expeses because everyone told you it was smart to keep that low interest rate mortage and invest in the market

marima33

Ouch, you are hurting an 80 year old's feelings you whippersnapper. The guy is young, doesn't know what he'll be doing with his bucks, lacks financial knowledge, is going into a market when the CAPE ratio is screaming 'poor forward returns'. Sure he's young enough to recover, but there's no reason for him to take much risk.

Master_Enthusiasm410

The 1929 comparison always ignores that the composition of the index is completely different. In 1929 you had leveraged banks and railroads. Now you have NVDA, MSFT and GOOGL compounding cash at 20%+ ROIC. Shiller CAPE is elevated, sure. But it's not an apples comparison.

zeugma_

CAPE itself embeds a macro view that 10-year earnings are more reliable than recent earnings for the purpose of valuation, as a matter of business/credit cyclicity. The view that recent earnings continue or rise is simply another macro view. Both are predictions on the future. CAPE will also catch up if recent real earnings indeed continue, it just chooses to believe when more data points are in. CAPE has been meaningful in the past because business cycles and credit cycles are real, so like I said, recency-based views are variations on "this time is different".

greenpride32

If you take a close look at CAPE/Shiller charts you will see that in 2017-18 timeframe it started to outpace historical trends, outside of dot com bubble. During that time I remember seeing many articles warning of this issue.. Here we are about a decade later and markets are substantially higher. I invest and hold major indices and indivdual stocks long term (former 25+ years, latter 8-20 years). I can sleep at night and continue to hold them because SP500 revenue, profit and distirbutions have trended up over time, and same for my individuals. That's why stocks increase in value. Macro issues no doubt will have some impacts, but when you have companies that have $70b+ on their balance sheets and pusing $25b to $30b to $40b in quarterly profits (I'm looking at you AAPL and NVDA) then there is no macro that will hold this down forever. That's why they call earnings the bottom line. It's also interesting that you pointed out NVDA and MSFT. They are both below current CAPE/Shiller AND are both growing earnings. You should be looking at TSLA and PLTR - without them the ratio probably goes down some \~2.5-3 points.

Exponential-777

Shiller CAPE ratio meant something 30 years ago

HenrytheXI

Respectfully disagree. Near term earnings are going to be meaningfully higher than whatever CAPE is capturing. Earnings are up on a real basis materially over the last 5 years and are expected (consensus anyway) to continue going up. That means for any given stock the EPS used for CAPE might be like 30% lower than this year and another 30% lower than next year. You may think that those new 60%+ higher earnings won’t hold but that’s a macro view not a valuation one

zeugma_

CAPE is inflation adjusted so it accounts for _that_ earnings growth. As for some real earnings growth that isn't captured by a 10-year cycle, it just makes another version of "this time is different". The only argument against CAPE now is it includes Covid, which that whole period 2020-2023 probably should be excluded.

Shantivanam

The CAPE Ratio still hasn't hit its all-time high.

HenrytheXI

Interesting but CAPE doesn’t account for growth and we’re in an all-time great cycle for earnings growth. Thanks for posting, thought provoking

Fair-Guitar2117

Question for the thread: for those of you who hold international exposure (VXUS, VEA, VWO or similar), how are you thinking about the allocation right now? I've been at 70/30 domestic/international for years but have been reading more arguments for increasing international weight given US valuations (CAPE around 35+) vs. developed international markets trading at significant discounts. Not suggesting market timing, but wondering if people are revisiting their target allocations vs. just their tactical positioning.

Rude_Pirate9078

Alright you sophisticated group of well intentioned strangers, have at it. Below are my asset allocations and thesis for my positions. For context I am planning to run this strategy for 20 years before moving into a glide path for retirement. Asset Allocation ​30% VTI (Broad US Market) ​35% VXUS (Broad International) ​15% AVUV (Avantis US Small-Cap Value) ​15% AVDV (Avantis Int'l Small-Cap Value) ​5% IBIT (iShares Bitcoin Trust) ​Thesis -​S&P 500 Concentration & Valuation Risk: The S&P 500 is top-heavy and expensive, with the Shiller CAPE ratio sitting around 40x. The index is dominated by mega-cap tech names, making it vulnerable to a flat or negative decade if multiples compress. Keeping VTI at 30% maintains broad U.S. market exposure while cutting back on this specific top-heavy risk (and SPCX IPO). -​Global Value and Profitability Overweight: Excluding crypto, the equity split is exactly 50/50 domestic and international. This setup captures the valuation discounts outside the U.S., where multiples are lower. Allocating 30% combined to AVUV and AVDV captures the size and value premiums, while Avantis's fundamental screens filter out unprofitable companies. This provides better immediate earnings yields in a higher-interest-rate environment. -​Sized Crypto Allocation for Total Return: IBIT is set at a 5% target. Bitcoin's high volatility means a small allocation can noticeably drive overall returns during a major market cycle, but the position size is restricted so that a severe crypto drawdown won't derail the core portfolio. What do you think?

Ragebait_Destroyer

CAPE is at dotcom level.

HazelCuate

are you sure this is the formula you used?  ln (1/CAPE) - ln(10y treasury yield) Thank you!

HazelCuate

I had never seen a ratio linking the CAPE and the 10-year Treasury yield before. I've been searching for months for ratios that indicate long-term overvaluation and calculating their predictive power in Python. Nice

Embarrassed-Sky6890

A Shiller P/E ratio (or CAPE ratio) of 42 means the stock market is exceptionally expensive and historically overvalued. It suggests that for every $1 of average, inflation-adjusted earnings over the last 10 years, investors are paying $42. This level has only been surpassed during the late-1990s dot-com bubble.

m0nsieurp

100% agree with your assessment. It is a bubble, that's not even a question. The unwinding though will be terrible. We're approaching insane valuations, unsustainable PEs, unsustainable market caps. SP500 CAPE ratio is approaching 44 and stock market to GDP ratio is ballooning to 230% of the US GDP. Who here truly believes the US stock market is worth twice the US GDP? Come on...

Humble_Code_6501

Stock market is at a 40 to 1 CAPE ratio seen only twice before... in 1929 and 1999...

subtle-savings

Not all asset prices are high for the same reason. High stock valuations probably do mean lower long-run expected returns from U.S. large caps. But CAPE is a poor crash timer. Markets can stay expensive for years if investors accept lower future returns, profits remain strong, or enthusiasm stays concentrated in mega-cap stocks. Housing is different: millions of owners are sitting on cheap mortgages and have little incentive to sell. Affordability can get much worse without home prices collapsing. Gold is different again because it has no earnings yield to anchor valuation. At 26, I would not wait in cash for everything to look cheap. I’d keep investing, diversify beyond the S&P 500, and use conservative return assumptions. More about what CAPE can and cannot tell investors: https://summitward.com/learn/do-valuations-still-matter

beerion

Yeah, absolutely. I'll note three things. 1. Consider 1996. That wouldn't be considered a lost decade by this measure because stocks were outpacing bonds by 2006 - even though that was straddled by massive underperformance on either side. The question is do we want to define a 1996 starting period as a lost decade? If so, the "rolling window" methodolgy is useful, which is Figure 3. If we do that, stocks fail to beat bonds 30+% of the time on a look-ahead basis. 2. My goal is to eventually see if we can use valuation levels to forecast periods of underperformance. For instance, if CAPE above 30 leads to a rolling window lost decade 50% of the time, that could be very useful. 3. Magnitude of relative performance matters as well. I've actually already put together a [study that forecasts the expected excess returns for stocks vs bonds](https://www.reddit.com/r/SecurityAnalysis/comments/1t40qad/estimating_the_equity_risk_premium/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button) (or implied equity risk premium).

Delicious-Plastic-44

Yup, you definitely missed the rocket. But at least you have a seat on one of the highest US-CAPE ever. That should be comfy

dekusyrup

Pretty easy to break it down. Inflation and dollar devaluation are the same thing. Growth due to speculation can be measured in P/E ratios, which shows CAPE is up about 20% in the past year. GDP growth is about 2.1% over the last year. So the SP500 is up about 28% the last 12 months, 20% is speculation, 4% is inflation/dollar devaluation, 2% is real economic growth. 1.2 x 1.04 * 1.02 = the full 27.3% of the sp500 growth.

FoodCooker62

"bond yields are skyrocketing!" "30 year highest since 2007!"  Nasdaq 2% from all time highs, up more than 25% in less than 2 months. CAPE ratio at near-2000 levels Meme mania market 🤔

SxeySteve

CAPE is near the dot com peak. ~42 today vs. ~44 Dec 1999

arkansaslax

He’s referring to cyclically adjusted PE (CAPE) which was 44 in November 1999 and is almost 42 right now. Higher than it has ever been in the intervening time.

Adventurous_Initial6

A few points: 1. Stocks get their value from the profits the underlying company makes. You can think of it as, if that company doubles in profits, they’re able to pay out twice as many dividends, and as such, its stock should be worth double what it was before. 2. The part talked about less: When the market cap of a company goes up (e.g you see headlines like 10 billion added to NVDA market cap), that’s not a REAL 10 billion dollars created. That’s a calculation of stock price * outstanding shares. And the stock price is essentially the last traded price of the most recent share. What this means is that if there’s a stock (think GameStop in 2021) where the buyers vastly outnumber the sellers in a short timespan, the last traded price will go up significantly and everyone will be green on paper, but when people try to exit, the price suddenly falls back down as quickly as it went up - meaning the “market cap” that you saw at the peak would have been a meaningless number because not everyone is able to get out at that price. Putting these two points together, my conclusion is, not investing in the long term is definitely a mistake because companies tend to grow, and that underlying growth serves as the fundamentals underpinning the stock price. HOWEVER (and this is my own personal opinion), the vast majority of investors today have kind of dismissed the possibility of the market crashing violently (which it’s done many times in the last). This leads to the frenzy type buying that you’ve seen in the last month and a half. It pushes the market cap up, but whether that growth is tied to fundamentals (point 1) or market euphoria (point 2) still remains to be seen. Anyway, nobody can make the decision on when/what to invest in but you. On the one hand, missing out long term is a mistake. On the other hand, many macro valuation indicators (think CAPE ratio) are at/near all time highs, and there’s certainly a risk of a large crash.

lookachoo

Woah, chill dude. I’m not saying sell. I’m saying the story was different 6 years ago so of course people would tell you differently then. And yeah they were wrong. But in reality right now nobody knows where this is going to go, a lot of Data centers are up in the air and we don’t know if they’re actually going to get built or not. For example if you do a DCF analysis on MU the base case value is at $450 where the Bull case is at $7000. It shouldn’t be a surprise that people are hesitant at these values. Lots of people are also hesitant on AI in general. The data centers are also a logistical nightmare to get established and the public hates them. We’re kind of on a teeter totter at the moment. The market as a whole is also extremely high. [CAPE or Shiller’s PE ratio is sitting at 42.18.](https://www.multpl.com/shiller-pe) Just 2 points under the all time high of during the dotcom boom. So just another reason people are hesitant. Everyone heard the same shit then and look what happened. Could it go even higher? We simply don’t know. Is it worth the risk? Depends on what your budget is. Nobody knows where it’s going to go, nobody should be bullied into buying into the FOMO. There’s also a billion other stocks out there to buy that are not at insane unaffordable levels that are ignored and undervalued so who cares if people sell their chip stocks high for a nice profit? Just hold and shut the fuck up

skilliard7

SP500 historical 10 year returns when CAPE >30 is less than 2%.

VotedOut

All you "V" guys are really eager to be bubble exit liquidity aren't ya? Bond yields are ripping higher. And the market is at or above dotcom bubble levels on every valuation metric (CAPE Ratio, Buffett Indicator, Mean Reversion, Market vs. Interest Rates). This is like the worst time in history to buy the "dip".

Aware_Secret_8910

Isn't CAPE above 40 at the same time?

milkplantation

I think this market is completely disconnected from reality and that the concentration risk is very worrisome. Historically, when the CAPE crosses 35, future 10 year annualized real returns hover around zero or trend negative. This market rally is built on thin volume and the smart money seems to be sitting it out. There are so many reasons to be pessimistic. BUT...I think we still have a lot more room to run. The AI trade really won't come under pressure until 2028. The president of the US recognizes this market and the AI trade is his golden goose. There is a lot of money in the system from COVID. I think we'll see a minor correction before the mid terms and then this thing will keep on chugging.

uncsucks

The signs of weakness are flashing red: hot CPI/PPI, oil shock, rising bond rates, consumer sentiment in the toilet, elevated Schiller CAPE, you name it. Only a matter of time

SmackEh

All of them. By several major valuation and momentum measures, the stock market is currently overbought. - Shiller CAPE - Buffett Indicator - Forward P/E (especially mega-cap tech) - etc. But this isn't a popular opinion... Continue to blindly invest.. DCA... bla bla bla

DSCN__034

Got it, thanks. But then it begs the next questions: if not stocks, then where should one allocate capital in a time of expanded Shiller CAPE: the US dollar, Treasuries, gold? For that matter, Are all stocks sectors the same in valuation? And what does history show about Shiller CAPE being used to time the market? I remember this same discussion when the Shiller CAPE was 30 an 35 and 38, yet the stock market is higher. Is there some structural reason why the Shiller CAPE may not be applicable today as when it was devised by Shiller (i.e., more intellectual versus industrial heft in the stock indices, rising profit margins, etc)? I honestly don't know the answers.

DSCN__034

Why would you use the Schiller CAPE and not the nominal PE to figure earnings yield? Just asking.

VotedOut

These same comments again? Time to repost what I posted in the other thread [here](https://www.reddit.com/r/wallstreetbets/comments/1tbjof2/comment/olhhrqm/?context=3): I imagine most of the comments here are going to age horribly. Michael Burry is absolutely right about this, and everyone is just burying their heads in the sand. First of all, there's some bad historical revisionism about Michael Burry here... 1. The 2023 "Sell" Tweet - In March 2023, he backed off his "Sell" tweet from January 2023. As he explains it [HERE](https://x.com/michaeljburry/status/1996768481002639515): >Jan 31, 2023 - I tweet “Sell” Banking crisis ensues and banks fail. There is panic and stocks fall. Mar 13, 2023 - I tweet “This crisis could resolve very quickly. I am not seeing true danger here.” March 30, 2023 - I tweet “I was wrong to say sell.” 2. "Michael Burry is a One-Hit Wonder" - No he's not. There's many other things that Burry got right, some of which (but not all of which) got mentioned in a Reddit comment [HERE](https://www.reddit.com/r/Burryology/comments/1pekast/burry_explaining_the_sell_tweet/). Second of all, the overall S&P 500 is at dotcom bubble level valuations by many objective metrics (charts can be seen [HERE](https://www.currentmarketvaluation.com/)): 1. [CAPE Ratio (Shiller PE Ratio) is at 42x](https://www.multpl.com/shiller-pe) \- 2.3 standard deviations above historical average. 2. Buffett Indicator is 2.5 standard deviations above historical trendline. 3. S&P 500 Mean Reversion is 2.47 standard deviations about historical trendline. 4. S&P 500 valuation relative to interest rates just recently hit 2 standard deviations above historical average. 5. Price-to-sales ratio is 3.2 standard deviations above historical average. These conditions don't occur often, and were present in 2000, and also mostly in 1929 and 2021. Bear markets followed each time. Make all your jokes about "Bears/doomers have called the last 20 of 2 recessions" or whatever, but this combination of valuation metrics is 3 for 3 in "calling" a bear market so far.

lookachoo

Market won’t feel the effect for months or even a year from now. [CAPE is near all time highs though.](https://www.multpl.com/shiller-pe) I see the market making new highs before dropping.

VotedOut

Saving this thread for a year or two later... or maybe even just a month or two later. I imagine most of the comments here are going to age horribly. Michael Burry is absolutely right about this, and everyone is just burying their heads in the sand. First of all, there's some bad historical revisionism about Michael Burry here... 1. The 2023 "Sell" Tweet - In March 2023, he backed off his "Sell" tweet from January 2023. As he explains it [HERE](https://x.com/michaeljburry/status/1996768481002639515): >Jan 31, 2023 - I tweet “Sell” Banking crisis ensues and banks fail. There is panic and stocks fall. Mar 13, 2023 - I tweet “This crisis could resolve very quickly. I am not seeing true danger here.” March 30, 2023 - I tweet “I was wrong to say sell.” 2. "Michael Burry is a One-Hit Wonder" - No he's not. There's many other things that Burry got right, some of which (but not all of which) got mentioned in a Reddit comment [HERE](https://www.reddit.com/r/Burryology/comments/1pekast/burry_explaining_the_sell_tweet/). Second of all, the overall S&P 500 is at dotcom bubble level valuations by many objective metrics (charts can be seen [HERE](https://www.currentmarketvaluation.com/)): 1. [CAPE Ratio (Shiller PE Ratio) is at 42x](https://www.multpl.com/shiller-pe) \- 2.3 standard deviations above historical average. 2. Buffett Indicator is 2.5 standard deviations above historical trendline. 3. S&P 500 Mean Reversion is 2.47 standard deviations about historical trendline. 4. S&P 500 valuation relative to interest rates just recently hit 2 standard deviations above historical average. 5. Price-to-sales ratio is 3.2 standard deviations above historical average. These conditions don't occur often, and were were present in 2000, and also mostly in 1929 and 2021. Bear markets followed each time. Make all your jokes about "Bears/doomers have called the last 20 of 2 recessions" or whatever), but this combination of valuation metrics is 3 for 3 in "calling" a bear market so far.

VotedOut

Bond yields breaking out... No more rate cuts... Inflation breaking out.. Blow-off top looking chart... CAPE ratio over 2 standard deviations overvalued (dot-com bubble levels) Buffett Indicator over 2 standard deviations overvalued (dot-com bubble levels) Mean Reversion over 2 standard deviations overvalued (dot-com bubble levels) And now Interest Rate Model touching 2 standard deviations overvalued too (dot-com bubble levels) ... And meanwhile, everyone here is like... "We V now!"

BiblicalElder

My 4x is admittedly conservative. But one thing we can underestimate is survivorship bias, that is, all the startups that didn't finish, or got acquired. Also, we may be in some kind of bubble. S&P 500 CAPE Shiller PE\* is hot right now: 42 (all time high of 44 back in Nov-Dec 1999). If you used 6x sales, that would be $15 trillion, still in my $2-20 trillion range. 8x would be the top of the range. I tend to use 1 significant digit for estimates. I think it's silly to sweat between 13.2 and 14.8, just '10' (or '9', or '20'). \*PE ratio on avg inflation adjusted earnings of the past 10 years

Delicious_Put_5857

lowest ERP and highest CAPE since 2000, make sure to buy the dip with everyone else who doesnt know what these things mean!

RetiredEarly2018

If one accepts that the market is mostly rational over the long term, one's long term returns from a portfolio depend on how much risk one is willing to take in the shorter term. As a result, the more you try to diversify away risk, the lower your returns in the long term. Yes I have heard about Japan and dotcom, but the ones that mention those are using hindsight bias to pick the top of the relevant market rather than looking across the full market cycle including the bull before the bear. Have you seen any CAPE studies looking at returns for 20 or thirty years?

acrossseasons

Apologies. I come across 100 comments a day referencing indicators that are incorrectly used to support a bias and I find it frustrating. I’m a big believer that investors should make their own decisions based on risk tolerance and objective numbers in the market. Im also a big believer that perma-bears scare off new investors, which is the best way for young people to build wealth and go beyond the middle class. I should probably take a break from stock subreddits Also, the CAPE ratio is a decent indicator that is currently saying the market is overbought. Its not accurate at determining crashes in the short term (1-2years), but is pretty accurate for estimating market returns in the long term (10 years)

acrossseasons

I agree. But to your CAPE ratio point, Shiller himself has said a high CAPE ratio is not a good indicator of an imminent crash. Markets can remain overvalued for years, and while high CAPE ratios often correlate with lower long-term (10-year) returns, they do not accurately predict short-term performance(next 1–2 years). If you believe in the AI buildout I think it’s fine to hold for another 6 months - 2 years depending on your risk tolerance. Personally, I’ll be out by midterms. Most of my AI buildout stocks have run up 100%-300% and by then they’ll probably be higher. If I end up losing out on more gains after midterms I’m fine with that

Delicious_Put_5857

global energy and food crisis with stocks at highest CAPE ever

beerion

Well you specifically called out the Nasdaq 100. >The whole point is that if there’s a bubble it ends up affecting the entire market’s evaluation I'm glad you brought that up. The S&P500 is just going to be the best barometer for "entire market". Annualized returns in the last 3 years of the dotcom bubble were 24.8%. From January of 2023, we're at 20.5%. 1999, alone, was only 20% for the broad market. Guess what TTM is? 30%. How about actual valuations? CAPE at peak of dotcom was 44x. Right now, it's 42x. TTM was 32x vs 32x today. I'm just saying that Nasdaq (however you want to define it) is voluntary inclusion. It happened to be the barometer for "new age" / startup tech in 1999. It most certainly is not that today.

VotedOut

So in other words, your response is: "Nah! Ah!" (with no reasoning for why I'm wrong and you're right). Everything I said there is true and MEANS SOMETHING (though I'll admit that my last 2 paragraphs are controversial and go against consensus, and I'm aware of that). Let's just take even the first part of my post where I mention 3 S&P 500 valuation metrics - the CAPE ratio, Buffett Indicator, and Mean Reversion - all being 2 standard deviations above historical norms right now. Guess when else that happened in history? 1929, 1999/2000, and 2021. Market crashes followed each time. I know "bears/doomers have called 20 of the last 2 recessions" or some shit is a running joke here.... but the combination of those 3 valuation indicators "calling" major market drawdowns has essentially been 3 for 3 so far. And as for individual stocks, the historical record proves that buying large or mega-cap stocks anywhere above 40x+ price-to-sales ratio pretty much always results in a major crash in that stock in the near future that at the very least allows you to avoid a drawdown and buy back in at a lower price.

Competitive_Pop_3286

Right? So the rally runs on longer than any would expect so it actually probably outperforms DCA before the CAPE falls out. I’d be pretty confident that CAPE>30 but falling great underperforms DCA.

PIzzaiolo_Master_510

CAPE is a simplistic tool, one with very limited actual usefulness. While it is educational for beginners to help them think about how earnings streams relate to market values, actual corporate valuation modeling is a quite complex task, as anyone in M&A work or financial reporting at a professional level can explain.

VotedOut

The market is in a tech bubble right now, period. There is so much "this is nothing like 1999 yet" denial in this thread. But for all the subtle differences, there are far more similarities. [CAPE Ratio, Buffett Indicator, and Mean Reversion all 2 standard deviations about historical norms. ](https://www.currentmarketvaluation.com/)(Just like they were in 1999/2000) "BuT iN 1999/2000 tHe CoMpAniEs DiDn'T HaVe ReAl eArniNgs... ToDaY tHeY Do." Stop with that crap. In 1999, there were both companies with real earnings being pumped high (MSFT, INTC, CSCO, etc.) as well as unprofitable trash. And today there are companies with real earnings being pumped high as well as unprofitable trash (space stocks like RKLB/ASTS, quantum computing stocks) trading in large cap territory that make less than $1B in top-line revenues. TSLA, PLTR are still hanging in there so far at crazy valuations. Crypto is still hanging in there even after proving for years over and over that they're mostly grifts. And the melt-ups lately in semiconductor and data center hardware stocks have been undeniable. And then there's the whole circular financing circle-jerk aspect to it that makes much of the reported earnings mostly a fugazi based on inorganic demand. To quote from [Ed Zitron's article](https://www.wheresyoured.at/am-i-meant-to-be-impressed/): > The story of massive AI demand is a lie — a trillion dollars annihilated to create the largest circle jerk of all time.  >Venture capitalists and hyperscalers feed money to OpenAI and Anthropic, so that venture capitalists can feed money to startups to feed to Anthropic and OpenAI, so that Anthropic and OpenAI can feed that money back to hyperscalers, who then feed that money to NVIDIA and buy more GPUs. 

KopOut

That’s the most hilarious part of this post. It beats it even more when you consider he just gave “cash” the Fed funds rate as a return. Bonds pay a higher yield than the Fed funds rate and if you did the buy CAPE under 15 strategy not only would get more interest from the bonds, you would also be automatically selling those bonds near their top as they would be sold after a huge market sell off (where money flees into bonds, driving up their prices). It’s sort of incredible that he proved how superior only buying the index when CAPE is below 15 is to any other strategy. In other words “Timing the market beats time in the market.” But of course everyone on here sees the opposite.

Once_Wise

CAPE of course is not an investment strategy, just the current real S&P price over the average real S&P Earnings over the prior 10 years. It has shown to be a reasonably good statistical estimate of the future 10 year returns, but that is not the same as being a timing strategy, it is just too long term for that. You backtested 12 strategies over 32 years. You have to expect that some will turn out better than others due to chance. I expect that you likely chose those strategies to test, based on some prior observations you made on how well they did vs other techniques. In other words you preselected data that you had already selected, and hence expected to do well over the historical data. This is just a normal thing people do, but it in no way shows that these back tested models will perform similarly in the future. To help you visualize this you should make up 12 random investing strategies and then rank them the same way as you did for your original strategies. You will find that some do much better than others. And since your previous investments strategies were not chose randomly, but based on your past history of evaluating these strategies, you can do the same with the new random ones. Take the best ones and then test them again against a number of new random strategies. Now compare the distribution of results, a histogram of the results, and compare your initial strategies to your random strategies. I think you will be surprised by the results. Just to have fair tests, the number of buy and sell occurrences need to be similar between both sets of tests. One of the things that has been studied hundreds of times in many peer reviewed studies, shows that making even using random models and back testing them can give you some great predictors. But just like your original strategies, they will turn out to be useless on new data going forward. They are just data specific models, chosen by your selection procedure and useful only on the data you have tested it against, not for any future use. Hope this is helpful.

2012DGCL

I'm not sure I'm reading this correctly. CAPE < 15 beat monthly DCA?

boringreddituserid

I see a lot of comments here and on other subreddits about the CAPE being so high. It is a backward looking statistic, taking the prior 10 years PE, inflation adjusted. This might have worked pre-internet age, with slow growing companies. But you have companies growing earnings at rates that would be unheard of in the past. The historical CAPE is about 21, but since 1991 the CAPE has been significantly above that average, excluding about 12 months after the GFC. Take NVDA as an example. 10 years ago NVDA had a market cap of $25B, today it is over $5T with earnings growth to support that growth. If you were to calculate the CAPE for NVDA it would be about 194, the current PE is 43, and the forward PE is 24. Similar with the overall S&P 500 CAPE, trailing PE, and forward PE. I’m not saying that CAPE is outdated, or has no value, but maybe it needs to be adjusted for the information age.

KopOut

I love that you only tested 32 years and that even when you did it and investing at CAPE under 15 was literally the 2nd place strategy behind the perfect timing strategy, you STILL dismissed it. Your backtest proved that over the last 32 years the Best strategy was CAPE investing…

ActuallyFinance

Have youe tried combining CAPE and trend? Here is a backtest I've been working on: https://actuallyfin.github.io/country-cape-backtest/

ValueEquities

thats actually a really intrstng one to run. my guess is it probably underperforms raw DCA over long periods but nowhere near as badly as the stricter cutoffs, just because you'd still be invested most of the time. the damage in the CAPE<=20 strategy came almost entirely from the cash drag not the entry timing itself.

GAV17

That's not really how CAPE based investing works though. The most frequent strategy isn't to stay in cash, it's to rotate to other markets/sectors. For example, the last 2 years those who wanted to avoid high valuations in the US markets would just invest in international stocks or even value stocks in the US market.

ValueEquities

I think his work is solid honestly. high CAPE has historically been a pretty good warning sign for lower long-term real returns. the part I’m more skeptical about is using it as a strict “stay out until valuations normalize” timing system, which the backtest didn’t handle very well.

ValueEquities

fair point on sample size, a handful of CAPE cycles in 32 years isn't a lot to draw conclusions from. the shifting baseline argument is interesting too, maybe 42 is the new normal and comparing to 1950s CAPE is just apples to oranges. but the cash drag problem holds regardless, sitting out has historically cost more than it saved even when valuations were stretched.

Competitive_Pop_3286

I’d be really curious to see CAPE >30 returns vs baseline.