A widely followed valuation gauge is flashing a warning. Another, made famous by Warren Buffett, is too. Here's what they tell investors.
A widely followed valuation gauge is flashing a warning.
Another, made famous by Warren Buffett, is too.
Here's what they tell investors.
The S&P 500 (^GSPC +0.28%) is still up about 12% this year, but the ride for investors has gotten a bit rougher lately. After setting a record earlier this month, the index has fallen nearly 2% as sticky inflation and rising bond yields spook investors.
And the tech-heavy Nasdaq Composite (^IXIC -0.02%) took an even bigger hit, dropping more than 4% from its high. Those rising yields hit high-growth tech stocks -- especially those that are tapping debt markets more and more -- harder. The sustainability of the artificial intelligence spending boom is keeping Wall Street on edge, especially given that stocks are very expensive by historical standards.
The Shiller CAPE ratio, one of the most widely followed measures of stock market valuation, has now been floating above 40 for a few months. That's only happened once before in 155 years of stock market data: during the peak of the dot-com bubble.
That's not exactly a comparison that inspires confidence.
What the CAPE ratio tells us
Short for cyclically adjusted price-to-earnings ratio, the CAPE compares the S&P 500's price with its average (inflation-adjusted) earnings over the previous 10 years. While a simple P/E ratio can make stocks look unusually cheap or expensive depending on whether businesses just had a great year or a terrible one, zooming out to a decade average removes the noise and helps give a clearer picture of what's actually going on.
The CAPE's long-term average is roughly 17.4. Today's reading is well over twice that. Its all-time high came in December 1999, when it reached 44.2. A few months later, the dot-com bubble burst, and the stock market began its precipitous decline, eventually losing nearly half of its value.
Averytin News Financial update.