The S&P 500 just flashed a rare warning signal last seen in dot-com bubble.
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If you’re following the stock market closely, you might have already picked up on the warning signals the market’s currently flashing — the sort that has historically made investors nervous. That signal is the Shiller Cyclically Adjusted Price-to-Earnings ratio — better known as the CAPE ratio — and it’s recently climbed to roughly 41.33 (1). This level has been reached only twice in the past century, with the last time occurring in the dot-com bubble.
The CAPE ratio, developed by Nobel Prize-winning economist Robert J. Shiller (2), compares stock prices to inflation-adjusted corporate earnings over the previous decade and is widely used as a measure of market valuation. Top Picks Since 1871, Shiller’s CAPE ratio has exceeded 24 on only six occasions (3).