This indicator hasn’t flashed this red since the dot-com bubble

This episode of The Indicator from Planet Money discusses the Shiller PE Ratio, also known as CAPE (Cyclically Adjusted Price-to-Earnings), a stock market indicator currently at its highest level since November 1999, just before the dot-com bubble burst. Co-hosts Darian Woods and Paddy Hirsch, along with guests Liz Ann Sonders (Chief Investment Strategist at Charles Schwab) and John Campbell (economics professor at Harvard and co-creator of the CAPE), explain that the ratio, which averages real earnings over the past 10 years and adjusts for inflation, indicates whether stocks are expensive or cheap relative to their long-term earnings power. While the current high CAPE ratio suggests expensive stocks and is comparable to levels seen before the dot-com crash, the experts caution that it is a long-term predictor of market returns over a decade, not a short-term forecast for immediate crashes. They also draw parallels between the current market excitement around AI and the dot-com era, noting that high valuations can persist and companies can grow into them, but long-term returns are likely to be lower when the CAPE is high.