The S&P 500 is currently exhibiting warning signs reminiscent of the dot-com era, raising alarms among investors. Historical context reveals that 1871 marks the beginning of economist Robert Shiller’s U.S. stock market dataset, foundational for the Shiller price-to-earnings (P/E) ratio, commonly referred to as the CAPE ratio.
The Shiller P/E ratio evaluates the price of a market index like the S&P 500 against its average inflation-adjusted earnings per share over the preceding decade. By smoothing out earnings over ten years, this measure provides a clearer perspective on whether the index is trading at a discount or premium, thereby avoiding distortions caused by unusually strong or weak years.
Historically, a Shiller P/E in the double-digit range, typically between 12 and 24, reflects reasonable market valuations. However, it has breached the 40 mark only twice before: first during the end of the dot-com bubble in 1999-2000, when it soared above 44, and then again in 2025, following three years of robust double-digit gains that pushed the S&P 500 up over 78%. As of January 2026, the Shiller P/E remains in the territory of 39 to 40, which has generated significant unease among investors.
The rapid escalation of the Shiller P/E has occurred only a couple of times in past decades—once in the roaring 1920s and again in the late 1990s—both of which culminated in substantial market downturns. This historical pattern raises concerns that the current market trajectory may lead to similar outcomes, prompting investors to reassess their stock choices carefully.
It’s essential to note that while the Shiller P/E serves as a useful indicator, it does not definitively predict future market behavior or guarantee a correction will manifest in 2026. However, it underscores the necessity for investors to be discerning in their selections. The current environment is likely to favor companies with solid balance sheets, resilient business models, and consistent earnings. Conversely, there is a growing skepticism toward speculative stocks, particularly those without revenue that may struggle during market sell-offs.
In conclusion, maintaining a focus on high-quality businesses and exercising patience in investment strategies will position investors favorably, regardless of whether a market correction occurs in the near future.
