Although the S&P 500 has climbed roughly 9% year to date and about 28% over the past year, Wall Street is now sitting on a valuation signal it has only ever flashed twice before. Tom Bilyeu, speaking on the Impact Theory show, said there have only been two other times in history when the cyclically-adjusted price-to-earnings ratio touched 40 to 1: 1929 and 1999. Today is the third. But the pattern carries weight only because of what followed both prior readings. “1929, for those not keeping score, that was the Great Depression. 1999, that was the dot-com bubble,” Bilyeu said.
The CAPE ratio, popularized by economist Robert Shiller, divides the S&P 500’s price by the trailing 10-year average of inflation-adjusted earnings. It smooths the boom-bust cycle into one long-horizon number. A reading of 40 means investors are paying 40 dollars for every dollar of average real earnings over the last decade. It’s the slow-moving valuation gauge, which is why its rare excursions to the upper extreme matter.
I’ve been studying CAPE readings for years, and what makes this moment heavy is the company it keeps. Two prior instances form a pattern, not a forecast. Bilyeu said: “There’s only been 2 other times in history where we’ve had a 40 to 1 CAPE ratio, and that was 1929, 1999, and today.”
1929: The Mirror That Stings
The roaring twenties produced exactly the kind of investor euphoria that pushes valuations to the moon. Margin debt vaulted, retail piled into hot names, and the prevailing view was that a new industrial era justified any multiple. The 1929 crash erased decades of paper wealth and rolled into the Great Depression. The CAPE warning was right. The recovery, by any honest measure, took years.
1999: The Mirror Investors Lived Through
The dot-com peak rhymed precisely. Internet companies with no profits were valued like sovereign mints. CAPE crossed 40. The Nasdaq lost roughly four-fifths of its value over the following years, and the S&P 500 effectively went nowhere for a decade after the peak in real terms. The signal worked again.
What 2026 Looks Like Around the CAPE
The backdrop is its own paradox. The VIX sits at 16.76, well inside its normal 15 to 20 range, suggesting investors are not paying up for downside protection. University of Michigan consumer sentiment, however, just registered 49.8 in April, the lowest reading in 12 months and deep in recessionary territory. Sentiment has slid from 61.7 last July to today’s level.
Bond yields are not offering shelter either. The 10-year Treasury yield closed at 4.57% on May 21, sitting in the 98th percentile of its recent range. The 10-year minus 2-year spread has compressed to 0.43%, down from a 12-month high of 0.74% in February. The Fed funds upper bound stands at 3.75% after 75 basis points of cuts since late October. Cheap money does less heavy lifting for valuations at these yield levels than it did in 2020.
Corporate earnings are growing. The Bureau of Economic Analysis pegs total corporate profits at $4,352.1 billion in Q4 2025, up 9.6% year over year. The catch is that prices have grown faster, which is precisely how CAPE gets to 40 in the first place.
The Bilyeu Playbook: Own Assets, Hold Cash
Bilyeu’s takeaway centers on preparation. “When I fiendishly encourage people to own assets, it is with the caveat that you need to have money on hand to live your life in case there is a rapid and terrifying downturn,” he said. That’s the practical lesson the 1929 and 1999 mirrors deliver. Drawdowns happen. Cash on hand keeps you from selling the bottom.
He also named the behavioral trap. “The hardest thing to do is to buy low and sell high. Everybody does the reverse. They buy high and sell low,” Bilyeu said. A CAPE of 40 is the “buying high” moment, by definition.
His guest, referred to as B, made the diversification point that pairs with the warning. “You don’t have to be perfect. You don’t have to win every game. You just have to win your game,” B said. Even early Bitcoin holders missed Nvidia. B recalled one such investor admitting, “well, you know, Nvidia did outperform me and I lost to the market.” Bilyeu added that Bitcoin’s early adopters were “evangelical about sovereignty and not that they thought this will be the greatest investment of all time.” Nobody catches every winner. Survival catches compounding.
The Verdict the Pattern Earns
Long term, Wall Street still heads higher in the decades to come. The 1929 and 1999 CAPE prints punished the people who entered at the peak with no cash buffer and no diversification, even as equity investing continued. The pattern says forward returns from CAPE 40 have historically been lower and drawdowns higher. The pattern does not say when. The prudent response is the unglamorous one: own quality, diversify, and hold enough cash to ride out a storm without being forced to sell at the bottom.
