The S&P 500 Is Flashing an Ominous Warning That's Been Observed Only Once Before. Will History Repeat Itself?
The S&P 500 Shiller CAPE ratio is on the verge of reaching its highest level in history.
Overview
The S&P 500 (SNPINDEX: ^GSPC) has long served as a barometer of investor sentiment. Among the tools used to assess the index's valuation, the cyclically adjusted price-to-earnings (CAPE) ratio stands out for its ability to sift through short-term noise and reveal whether stocks are priced reasonably relative to their long-term earnings history. Understanding this metric helps explain both market extremes and the steps smart investors can take when prices climb sharply.
The CAPE ratio divides the current level of the S&P 500 by the average of inflation-adjusted earnings over the past 10 years. This approach removes the fluctuations that can distort ordinary price-to-earnings (P/E) ratios, which can appear artificially low during periods of abnormally high profits or artificially high after a single down year.
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Originally published at www.fool.com.
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