The S&P 500’s cyclically-adjusted price-to-earnings (CAPE) ratio reached 41.1 in August, a valuation not observed since the dot-com bust. The August reading is the highest for the index since Sept. 2000, when the CAPE ratio hit 41.9. The S&P 500 currently trades at $7,684.
History indicates substantial downside for the S&P 500 following such elevated valuations. When the CAPE ratio has exceeded 40, the index has never recorded a positive three-year return.
If future performance aligns with historical averages, the S&P 500 could drop 19 percent by Aug. 2028. This historical average further suggests a 30 percent decline for the index by Aug. 2029.
This valuation alarm follows recent warnings from Warren Buffett about increasing speculative behavior in the stock market. Buffett told CNBC in May that market participants are in “a more gambling mood than now.”
He cautioned that some investors treat the stock market like a casino, placing “irresponsible bets” that push valuations to “very silly” levels. Buffett previously echoed this sentiment in his 2024 shareholder letter, stating markets “exhibit far more casino-like behavior” than in his youth.
The S&P 500 has advanced 12 percent year to date in 2026, despite persistent inflation and high energy prices stemming from the Iran conflict. Strong financial results have primarily driven these double-digit returns.
S&P 500 earnings are forecast to increase 32 percent this year. This projected growth represents the fastest annual increase outside of a post-recession recovery in more than three decades.
Economist Robert Shiller introduced the CAPE ratio in 1988 to evaluate entire stock market indexes. This metric averages inflation-adjusted earnings from the past decade to filter out cyclical earnings fluctuations.
The August CAPE ratio of 41.1 stands well above the 30-year average of 29. The Sept. 2000 reading of 41.9 occurred as the dot-com crash began to spread beyond technology stocks.
Past performance does not guarantee future results. The CAPE multiple is a backward-looking indicator and does not account for the possibility of faster S&P 500 earnings growth in the future.
