1. Current Valuation: Near Historic Extremes
The Shiller CAPE ratio—a cyclically adjusted P/E metric averaging inflation‑adjusted earnings over ten years—is currently hovering between 37–38, compared to its long-term average of ~17–18. Historically, such levels have been reached only during three major valuation peaks:
- 1929 (Great Depression)
- 2000 (Dot‑com bubble)
- 2007 (Pre‑Global Financial Crisis)
A CAPE above 30 typically serves as a “red alert” valuation level. As of mid‑2025, the CAPE remains near these historical extremes—suggesting equities are richly priced.
2. Historical Perspective & Expected Returns
Long-term data highlights an inverse relationship between starting CAPE levels and future real returns. A Wharton/Barclays study covering 1926–2017 shows:
| Starting CAPE | Avg 10‑yr Real Return | Worst Case | Best Case |
| < 18 | ~8% | ~–4% | ~14% |
| 24–33 | ~2.5–3% | ~–4% | ~7% |
| > 33 | ~0.9% | ~–6% | ~5.8% |
Currently, CAPE sits in the highest decile (>33), implying expected real returns over the next decade could average under 1% annually, with significant downside risk.
3. Additional Valuation Metrics & Market Context
a) Trailing and Forward P/E
- Trailing P/E: ~28.2, ~1.5σ above historical mean (20–22 range)
- Forward P/E: ~24.3—still historically elevated
b) Earnings Yield vs. Bond Yields (“Fed Model”)
The earnings yield (inverse of P/E) remains barely higher than the 10-year Treasury yield (~4%), meaning the equity risk premium is near zero or negative—a warning sign given higher bond yields could lure investors away.
c) Buffett Indicator (Market Cap-to-GDP)
The S&P 500’s market cap is about 167% of GDP (end‑2024). Historically, readings above 100–120% have coincided with elevated market valuation regimes and fragile returns.
4. Bear Case: Historical Drawdowns After High Valuations
Here’s a comparative table showing major drawdowns following CAPE peaks:
| CAPE Peak | Peak Year | Subsequent Drawdown | Drawdown Period |
| ~44.2 | Dec 1999 | –49% (Mar 2000 to Oct 2002) | 2½ years |
| ~32 | Aug 1929 | –83% (Sep 1929 to Jun 1932) | 3 years |
| ~38 | Early 2025 | ? (Price risk remains high) | Ongoing |
Following 1929 and 1999, equities produced negative returns for years, matching the anomalously high starting valuations.
6. Why This Might Be Different Today
- Corporate profit margins are historically elevated (~50%)—notably due to dominant, high-margin tech giants. This supports higher P/E multiples relative to past cycles.
- The current AI-driven tech surge, although reminiscent of dot-com, diverges in that companies have stronger underlying fundamentals—yet the concentration risk is higher (tech makes up ~34% of S&P, vs. ~33% in 2000).
- Strong earnings growth projections (6–14% through 2026) plus benign bond yields add support—but these are priced in, leaving little margin for negative surprises.
7. Investment Outlook: Risk-Managed Approach
Sell The *Very Strong Expletive* thing and don’t be one of those idiots who says: It is different this time!!!
