The S&P 500's Shiller P/E Is Above 40. History Says What Happened the Only Other Time.
Key PointsThe S&P 500's cyclically adjusted price-to-earnings ratio ended Oct. 28 at 41.04, versus a long-term average of around 17.
In October 2000, the S&P 500's Shiller P/E ratio reached 41.04, the highest it had reached since 1999. The cyclically adjusted price-to-earnings ratio, popularized by economist Robert Shiller, is calculated by dividing the index price by its average earnings over the previous 10 years, adjusted for inflation. This metric smooths out both recessions and boom years.
For the 21 months after May 1999, the ratio had been above 40 every month. From its close of 1,397.72 on December 1, 1999, when the ratio peaked, the index declined by around 6% to 22% after five years and by about 21% after 10 years. It hit a low of 776.76 on October 9, 2002, which was around 49% below its September 1, 2000, close.
Over the subsequent decade, even with reinvested dividends, the total return of the S&P 500 was still around 14% lower.
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