The Indicator from Planet Money

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

November 6, 2025

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  • The Shiller PE Ratio (or CAPE ratio), currently at its highest level since the peak of the dot-com bubble in November 1999, is a long-term predictor that associates high values with lower subsequent 10-year returns. 
  • The CAPE ratio, developed by Robert Schiller and John Campbell, differs from a standard PE ratio by using the average of real earnings over the past 10 years, adjusted for inflation, to provide a normalized measure of stock valuation. 
  • Current high valuations, partly driven by excitement over AI technology reminiscent of the late 1990s internet boom, should not be used to predict short-term market crashes, as high valuations can persist for extended periods. 

Segments

Shiller PE Ratio Introduction
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(00:00:30)
  • Key Takeaway: The Shiller-PE ratio is at its highest level since November 1999, the peak before the 2000 dot-com bubble burst.
  • Summary: The Shiller-PE ratio is currently at a level not seen since the peak of the online gold rush in 1999. This historical high level is causing concern among internet-focused investors. The episode promises to explain what the ratio is and whether current high levels warrant worry.
CAPE Ratio Origin and Definition
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(00:02:33)
  • Key Takeaway: The CAPE ratio, or Cyclically Adjusted Price to Earnings ratio, was developed by economists Robert Schiller and John Campbell.
  • Summary: The ratio is often shortened to Schiller’s Cape, though John Campbell is a co-creator who helped popularize it alongside Schiller’s book, Irrational Exuberance. The CAPE ratio applies to the entire S&P 500, unlike a standard PE ratio applied to a single company. It calculates price divided by the average of real earnings over the past 10 years.
CAPE Ratio Mechanics and Interpretation
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(00:04:36)
  • Key Takeaway: The 10-year lookback and inflation adjustment in the CAPE ratio remove short-term volatility, providing a more accurate measure of long-term earnings power.
  • Summary: Using 10 years of earnings smooths out distortions, such as those caused by the pandemic in 2020. A high CAPE number indicates stocks are expensive relative to long-term earnings, while a low number suggests they are cheap. The current ratio is near 40, close to the 45 peak seen in 2000.
CAPE as Long-Term Predictor
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(00:05:57)
  • Key Takeaway: The CAPE ratio is a long-term indicator, associating high values with low subsequent 10-year returns and low values with high returns.
  • Summary: The ratio cannot predict market movements in the short term (tomorrow, next few weeks, or months). When the CAPE number is high, market returns tend to be lower over the following decade. Conversely, low CAPE numbers historically correlate with higher long-term returns.
CAPE as Sentiment Gauge
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(00:07:12)
  • Key Takeaway: The CAPE ratio functions best as a gauge of investor sentiment, reflecting enthusiasm that allows investors to pay more for stocks regardless of valuation.
  • Summary: Investors often misread the high CAPE number by predicting an immediate crash based on the dot-com comparison. Markets can remain expensive for extended periods even when indicators suggest otherwise. High sentiment means there is less regard for whether the market is objectively expensive.
AI Bubble Comparisons
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(00:07:45)
  • Key Takeaway: Current market concerns draw parallels to the dot-com bubble due to massive investment in nascent AI technology where not all companies can succeed.
  • Summary: Similar to the late 1990s, many companies are pouring capital into AI without fully understanding its ultimate achievable scope. It is unlikely that numerous companies in the AI space will all become major winners. High valuations are not always off-base, as demonstrated by Cisco Systems in 1999, which grew into its high valuation.