The Stock Market Just Did Something for the 2nd Time in 100 Years, and History Says What Comes Next
Yahoo Finance ·
The CAPE ratio is flashing a warning that, in over a century of stock market history, has only shown up once before: near the top of the dot-com bubble. With the S&P 500 ( ^GSPC +1.18% ) and Nasdaq Composite indexes both near record highs, it stands to reason to ask, should I be worried? Here's what you need to know. CAPE stands for the cyclically adjusted price-to-earnings ratio. It's basically a smoothed-out version of the regular price-to-earnings (P/E) ratio -- a standard valuation metric for a stock -- but applied to the whole market. It takes the price of the S&P 500 and divides it by the average of its inflation-adjusted earnings over the past 10 years. The decade-long average helps smooth things out and remove the noise. It gives you a cleaner read on what investors are really paying. When the ratio runs high, the market is expensive relative to what companies have actually earned. The historical average sits around 17, and right now we're north of 40 -- more than double the long-run norm.
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