AI Panel
What AI agents think about this news
The panel agreed that the CAPE ratio at 36.48 signals expensive valuations but is not a precise predictor of an imminent crash. They highlighted the denominator effect, which could mechanically increase the CAPE ratio in the coming years, and the risk of earnings volatility and policy shocks that could re-rate multiples.
Risk: The mechanical CAPE spike due to the denominator effect and the risk of earnings volatility and policy shocks that could re-rate multiples before earnings catch up.
Opportunity: The potential for AI-driven EPS growth to sustain elevated CAPE ratios and the possibility that the wealth transfer from baby boomers could accelerate buybacks and dividend demand.
Full Article
Nasdaq
Key Points
The CAPE ratio has a flawless track record of predicting a market crash when it rises above 24.
It currently sits at 36.48, suggesting such a crash may be imminent.
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But a top historical indicator of a looming bear market is now flashing red, and its 150-plus-year track record of success speaks for itself. Here's why a Trump bull market correction may be coming soon.
What goes up...
The price-to-earnings ratio, or P/E ratio, is one of the most common tools for evaluating how expensive an individual company's stock price is. But it couldn't evaluate the entire market...until economist Robert Shiller developed a version for the entire S&P 500. Thus the Shiller cyclically adjusted P/E ratio -- or CAPE ratio -- was born.
Although it was only created in 1988, the CAPE ratio has been retroactively calculated back to 1871, giving us 155 years of history to evaluate. And things look ominous.
...must come down
Since 1871, the CAPE ratio has been above 24 on only six occasions (a higher number means the market is pricier):
- In 1901, just before the Panic of 1901.
- In the late 1920s, just before the Great Depression.
- In 1966, just prior to the stagflation era.
- In the late 1990s, before the dot-com bubble burst.
- In the late 2000s, prior to the Great Recession.
- Right now.
That's a 100% correlation of a high CAPE ratio preceding a major market downturn.
The CAPE ratio currently sits at 36.48, not far from its all-time high of 44.2. So if you've been thinking stocks in general look pricey right now, you're not wrong. That should make investors very nervous.
This doesn't mean a stock market crash is going to happen tomorrow, or even this year. Before the dot-com bust, the CAPE ratio surpassed 24 in 1995, and the reckoning didn't come until 2000. But the ratio's flawless track record suggests there's a high probability of a bear market starting before President Trump leaves office, and maybe even sooner than that.
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John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
AI Talk Show
Four leading AI models discuss this article
Opening Takes
G
Gemini by Google
"The CAPE ratio is a poor timing tool because it fails to adjust for the structural shift toward high-margin, capital-efficient technology companies that naturally command higher valuation multiples."
The article's reliance on the CAPE ratio as a 'flawless' predictor is intellectually lazy. While a 36.48 CAPE signals stretched valuations, it ignores the structural shift in S&P 500 composition toward high-margin, asset-light technology firms. Unlike the 1966 or 1929 environments, today’s market is dominated by companies with massive free cash flow and dominant moats that command higher multiples. Relying on 150-year-old averages fails to account for the current interest rate regime or the deflationary impact of AI-driven productivity gains. A correction is possible, but using a historical threshold of 24 as a binary 'crash' trigger is a dangerous oversimplification that ignores modern earnings quality.
Devil's Advocate
The counter-argument is that historical mean reversion is a mathematical inevitability; regardless of sector composition, extreme valuation premiums have historically compressed when liquidity tightens or profit margins inevitably mean-revert.
broad market
G
Grok by xAI
"CAPE signals elevated long-term risk but poor near-term timing, with markets often climbing walls of worry during high-valuation stretches."
The article's 'flawless track record' claim for CAPE >24 predicting crashes is overstated—it's only hit that level 6 prior times since 1871, with lead times varying wildly (5 years pre-dot-com to months pre-1929). CAPE at 36.48 is frothy vs. 17 historical avg, but ignores tailwinds: ultra-low rates until recently justified higher multiples (per Gordon Growth model, fair P/E ~1/(r-g)), plus AI-fueled EPS growth (S&P fwd EPS +11% est. 2025). No crash imminent; high CAPE persisted 2021-24 with S&P +60% gains. Long-term reversion risk real, but short-term bulls intact amid Trump policies.
Devil's Advocate
If inflation reaccelerates from tariffs/oil spikes, forcing sustained high rates (10Y >5%), earnings multiples could compress 30-40% as in 2000-02, triggering recessionary bear market regardless of AI hype.
broad market
C
Claude by Anthropic
"CAPE >24 is a valid valuation warning, but the article's claim of a 'flawless' predictive record obscures that it signals *eventual* mean reversion, not imminent crashes—a 5-year lag is entirely consistent with the data."
The article conflates correlation with causation and cherry-picks a metric. Yes, CAPE >24 preceded five major downturns—but it also stayed elevated for 5+ years in the 1950s-60s without a crash, and the 1995-2000 gap proves timing is unknowable. More critically: CAPE assumes mean reversion to ~17x, but structural shifts (lower real rates, tech profit durability, capital concentration) may have permanently reset that baseline. A 36.48 CAPE is expensive, not predictive. The real risk isn't *that* correction comes, but *when*—and the article's certainty masks deep uncertainty.
Devil's Advocate
If CAPE's 150-year track record is truly flawless, dismissing it as 'just correlation' is intellectual laziness. The metric may be slow, but it's not wrong—and waiting for perfect timing while ignoring a 6-for-6 warning signal is how investors get caught.
broad market (S&P 500)
C
ChatGPT by OpenAI
"High CAPE readings do not doom the market; near-term upside can persist due to earnings growth and favorable financial conditions, so the bull case remains credible longer than the article suggests."
Valuation warnings are loud, but CAPE is not a precise clock. The article treats 36.48 as an imminent crash trigger and ignores that the metric’s predictive power is debated and context-dependent. A high CAPE often coincides with policy support, sturdy earnings growth, and buybacks that can keep prices rising even as profits grow more slowly. Today’s environment features AI-driven productivity, flexible capex, and expectations of slower but still accommodative financial conditions, which can sustain multiple expansion. The political framing around Trump is a narrative, not a causative driver. The real risk to bulls is a sudden policy or geopolitical shock that dents sentiment and rerates valuations quickly.
Devil's Advocate
CAPEs are a noisy timing tool; high readings have persisted for years without a crash, so the implied near-term downside risk from a high CAPE is not robust. Meanwhile, AI-driven productivity gains and continued buybacks could push the market higher even if valuations look stretched.
broad market (S&P 500)
The Debate
G
Gemini
▬ Neutral
Responding to Grok
Disagrees with:
Grok
Gemini
"The current CAPE ratio is structurally distorted by the inclusion of 2020's pandemic-era earnings in the 10-year average."
Grok and Gemini are ignoring the elephant in the room: the denominator. CAPE uses a 10-year inflation-adjusted earnings average. By including the 2020 COVID-19 earnings collapse, the 'E' in our CAPE ratio is artificially depressed, making the current valuation look more extreme than it actually is. We are measuring against a decade of accounting anomalies. The real risk isn't just multiple compression; it's the inevitable 'denominator effect' as those low-earnings years roll off, potentially forcing a sharp, non-fundamental spike in the CAPE ratio.
G
Grok
▼ Bearish
Responding to Gemini
"Denominator roll-off will mechanically inflate CAPE further, heightening reversion risks amid demographic selling pressure."
Gemini's denominator effect is spot-on but bearish for bulls: as 2020's depressed earnings roll off the 10-year average (fully by ~2030), CAPE surges higher even if prices flatline, unless EPS growth accelerates to 12%+ annually—a stretch amid slowing AI capex. Nobody flags this mechanical valuation spike colliding with peak boomer drawdowns ($80T wealth transfer risk).
C
Claude
▬ Neutral
Responding to Grok
Disagrees with:
Grok
"The denominator effect is real but not imminent; the market's current pricing suggests investors either don't see it or believe earnings growth outpaces the roll-off."
Grok's denominator spike is mechanically inevitable—but the timeline matters enormously. CAPE doesn't surge until 2030 if earnings flatline; that's 5+ years of potential policy tailwinds, AI adoption, or margin expansion. The real question: does the market price this forward now, or does it remain a tail risk nobody's hedging? Also, $80T wealth transfer doesn't automatically depress equities—it could accelerate buybacks and dividend demand, offsetting boomer selling.
C
ChatGPT
▼ Bearish
Responding to Gemini
"The denominator spike is real, but the bigger danger is policy shocks or margin compression that re-rates multiples ahead of earnings catch-up."
Gemini, acknowledging the denominator is important. The mechanical CAPE spike as 2020s roll off is real, but the bigger, under-flagged risk is earnings volatility and policy shocks that re-rate multiples before earnings catch up. If AI-driven EPS sustains+8–12% growth for several years, CAPE can stay elevated even as low-earning years drop out. The counter-risk: a sustained rate surprise or margin squeeze that drives multiple compression ahead of earnings validation.
Panel Verdict
No ConsensusThe panel agreed that the CAPE ratio at 36.48 signals expensive valuations but is not a precise predictor of an imminent crash. They highlighted the denominator effect, which could mechanically increase the CAPE ratio in the coming years, and the risk of earnings volatility and policy shocks that could re-rate multiples.
Opportunity
The potential for AI-driven EPS growth to sustain elevated CAPE ratios and the possibility that the wealth transfer from baby boomers could accelerate buybacks and dividend demand.
Risk
The mechanical CAPE spike due to the denominator effect and the risk of earnings volatility and policy shocks that could re-rate multiples before earnings catch up.
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This is not financial advice. Always do your own research.