The S&P 500 (^GSPC -0.10%) has been on quite a ride recently. After gaining more than 6% in the first two weeks of August, it’s now 2% off its Aug. 13 high. The Nasdaq Composite‘s performance over the same period has been even more up-and-down (hardly a surprise for the tech-heavy index) — up nearly 10%, then down nearly 3%.
Something else happened during those weeks that’s definitely worth paying attention to: The Shiller CAPE ratio, the most widely followed measure of how expensive the stock market is, crossed above 41. In 145 years of data, it’s been above 41 exactly twice — right now, and at the peak of the dot-com bubble in late 1999.
So what should an investor do?
Today’s Change
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The CAPE ratio’s 145-year average is 17.4, and today it’s above 41
CAPE stands for cyclically adjusted price-to-earnings ratio. It takes the price of the S&P 500 and divides it by the index’s average inflation-adjusted earnings over the past 10 years. That’s helpful because a regular price-to-earnings (P/E) ratio can get thrown off by one great year or one terrible one, and the 10-year average strips a lot of that noise out.
The long-run mean is 17.4, and the all-time record is December 1999, when the CAPE reached just above 44. Months later, the dot-com bubble burst, and the S&P 500 proceeded to lose nearly half of its value. Take a look at the CAPE ratio over the last 145 years.
S&P 500 Shiller CAPE Ratio data by YCharts.
The Buffett indicator hit an all-time high above 240% on Aug. 18
The CAPE ratio isn’t the only market gauge at an extreme level. The Buffett indicator — the total value of the stock market divided by the gross domestic product (GDP), a measure of the size of a country’s whole economy — is now north of 240% as of Aug. 18, 2026. That’s an all-time high.
The Oracle of Omaha himself, Warren Buffett, who popularized the indicator in 2001 — in the aftermath of the dot-com crash — wrote that when the ratio approaches 200%, “you are playing with fire.” We are now well beyond that and well beyond its peak in 1999.
Buybacks, accounting changes, and foreign earnings all affect today’s readings
Now, let me address a few things straight on: There are real issues with giving too much credence to any one metric, and both of these have their flaws. Buffett himself has cautioned investors not to over-emphasize his indicator. For one, over time, markets have simply become a bigger part of our economy, and more people are invested in stocks than ever before. That will naturally shift the balance.
Many U.S. companies today make a lot more money outside of the U.S. than they did in the past. That value doesn’t show up in the U.S. GDP, but it does — and should — show up in stock prices.
As for the CAPE, plenty of people rightly point out that there have been some accounting changes over the years that make today’s earnings look less attractive than they would have looked in the past. Companies today tend to buy back their stocks instead of paying shareholders through dividends. This helps boost stock prices, inflating the CAPE ratio relative to earlier generations.
Don’t ignore the record figures
These are real reasons to take these readings with a grain of salt. Still, I really don’t think you should dismiss them.
In my view, this market is indeed very expensive, and while the earnings from Nvidia and Alphabet look more impressive and durable than things did in the dot-com era, there are reasons to be skeptical of that argument. Right now, a lot of the eye-popping revenue these companies are booking is coming from each other, not from end users. That’s not the healthiest system, in my opinion.
Image source: Getty Images.
An expensive market can stay expensive for years before it corrects
So where does that leave us? If we take the CAPE seriously, what does history say comes next? The obvious connection to 1999 would seem to say that a crash is imminent. It may be, but it also could be years off. The frustrating truth is that the market can be overpriced and stay that way. Stocks can keep gaining for months — or years.
Plenty of people predicted the dot-com bubble years before it actually burst, and they missed enormous gains in the meantime. What I would do is evaluate your portfolio and make sure you are invested in quality businesses that can endure a major shake-up, not stocks built on hype and speculation.
In the end, what history really tells us is that timing the market is impossible and that over the long haul, patient, steady investing wins every time.
