This Stock Market Valuation Metric Just Hit a Two-Decade High. Here's What History Says the S&P 500 Does Next.
It's an ominous warning, and investors should be prepared.
Overview
With the S&P 500 (SNPINDEX: ^GSPC) up more than 8% year to date, the market is gearing up for the fourth year in a row of gains. However, there are signs that the market is frothy. The S&P 500 could continue to thrive if valuations are in check and the economy is booming, but if valuations lose touch with reality, investors should definitely be concerned.
Image source: Getty Images.
The cyclically adjusted P/E ratio, or CAPE ratio, measures the S&P 500's total price-to-earnings ratio based on the past 10 years' worth of average earnings, adjusted for inflation, which smooths out the distortions of any one unusually good — or bad — year. That makes it a more reliable measure of the market's value than the standard average P/E ratio. Today, the CAPE ratio is at its highest level in more than 25 years and the second-highest ever.
Details
Source
Originally published at www.fool.com.
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