09 OCTOBER 2025
There is some chatter that equity markets may be approaching another major cycle peak. And the chart below is one of the main reasons why.
It shows the S&P 500 cyclically-adjusted price/earnings (or CAPE) ratio, going all the way back to 1900.
It uses a 10 year average figure for earnings, which helps to smooth out short-term fluctuations in the business cycle.
Historically, a high CAPE has been associated with low subsequent returns and vice versa.
Taking it a step further, every time the ratio has risen above 30x, a major decline in the US stock market has ultimately followed.
So with a current reading of 38x there is reason for caution.
Encouragingly, this particular valuation metric is a lousy market-timing tool and there have been several past instances where high CAPE ratios have seen stock prices march on to much higher highs.
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