- The S&P 500’s CAPE ratio, which measures inflation-adjusted earnings over the past 10 years, reached its highest level since the 2000s tech bubble and recently surpassed its peaks just before the 1929 market crash.
- The valuation gauge also doubled its historical mean of 16.72 on Monday.
- The metric suggests the stock market may be grossly overpriced – but it’s not perfect, the Deutsche Bank strategist Jim Reid said. The CAPE ratio has been above its historical average since 1991, barring a 10-month period during the financial crisis.
- Tech giants are probably boosting the ratio in a way “they probably never have before,” Reid said.
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One measure of stock-market pricing suggests vaccine-fueled bullishness might have stretched valuations too thin.
The S&P 500’s cyclically adjusted price-to-earnings, or CAPE, ratio is at its highest point since the 2000s tech bubble, the Deutsche Bank strategist Jim Reid said in a note. It also exceeds its levels just before the 1929 market crash and its more recent high in January 2018.
The gauge measures average inflation-adjusted earnings over the past 10 years, as opposed to current profits. The ratio was popularized by the famed economist Robert Shiller and is also known as the Shiller price-to-earnings ratio.
The CAPE ratio hit 33.71 on Monday, double the historical mean of 16.72. It hit a record high of 44.19 in December 1999.
The lofty reading came as stocks dipped from record highs achieved on Friday. US equities fell on Monday as soaring COVID-19 case counts prompted new economic restrictions in California. Though hopes about a vaccine continue to inspire risk-taking, public-health experts have said that the pandemic is likely to get worse before a shot is widely distributed.
The CAPE ratio is typically used to gauge whether the market is overpriced or undervalued, but it should be taken with a grain of salt, Reid said. For one, the gauge has sat above its long-term average since early 1991, barring a 10-month period during the financial crisis.
“If this ratio does mean revert (which it probably does) it can take a lifetime of investing and structural shifts to do so in both directions,” the strategist said.
A small set of mega-cap tech stocks played a role in driving the indicator higher, Reid added. The market’s biggest stocks are influencing the CAPE in a way “they probably never have before” and are likely to determine whether the gauge swings higher still or retraces its uptick.
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