The sharp rise in U.S. equity valuations may indicate that the artificial intelligence-fueled bull market is entering its most speculative phase, according to Capital Economics.
In a note published Tuesday, Chief Economic Adviser John Higgins highlighted that the S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) has climbed more than 12 points since the beginning of 2023 and now sits above 40
According to Higgins, the measure has reached “a level last seen before the dotcom bubble burst.” Valuation Expansion Driving Much of the Market’s Gains Capital Economics estimates that valuation expansion, rather than earnings growth alone, has been responsible for a significant portion of the S&P 500’s advance since early 2023, which the firm views as the starting point of the current AI-driven rally. The CAPE ratio has accounted for more than two-thirds of the index’s gains over that period. Higgins said this development is “one sign that we may be in the ‘blow-off’ phase of the AI-fuelled rally.” Traditional Valuation Measures Paint a Less Extreme Picture While the CAPE ratio points to stretched valuations, other metrics appear less alarming.
The S&P 500’s forward 12-month price-to-earnings ratio has increased by fewer than four points since the start of the rally and currently stands at roughly 21. That remains below the levels reached during the dotcom era, when the measure exceeded 24. Similarly, the forward three-year earnings multiple has contributed only a modest portion of the market’s advance and currently sits near 17, compared with a peak above 22 during the technology bubble.