S&P 500 CAPE Ratio Tops 40, Raising Concerns of Overvaluation

The cyclically adjusted price‑to‑earnings (CAPE) ratio for the S&P 500 has stayed above 40 for three consecutive months, a level only seen once before in more than a century – during the dot‑com bubble that erased nearly half of the index’s value between 2000 and 2002. Analysts note that unlike the early‑2000s, today’s market is dominated by profitable technology giants such as Microsoft, Nvidia, Alphabet and Amazon, which could cushion a valuation correction.

A Federal Reserve Board economist, Dino Palazzo, argues that the traditional CAPE figure is inflated by accounting changes that distort earnings, especially R&D expensing and broader asset‑impairment rules introduced in the 1990s. His revised “CAPE‑H” metric removes these distortions, showing that the standard CAPE may overstate true earnings by about 44 %. This debate highlights whether the current high CAPE signals a repeat of the dot‑com crash or a measurement artifact in a market backed by stronger corporate balance sheets.