US stocks overvalued? Shiller PE ratio crosses 40 for only the second time in history

What Is the Shiller CAPE Ratio?

The P/E, or price-to-earnings ratio, is a key number many investors look at when deciding to buy or sell a stock. It compares a company’s stock price to its earnings per share. In simple terms, it shows the price investors are willing to pay for each dollar of profit.

The CAPE ratio, or Shiller PE Ratio, is different from the traditional P/E. It accounts for inflation over the past 10 years. American economist Robert Shiller developed it to check whether the market is undervalued or overvalued compared with its inflation-adjusted earnings record. The ratio works out the P/E of S&P 500 stocks while smoothing profits over the last ten years and adjusting for inflation.

Prices Are Running Faster Than Earnings

US stock prices have been on a spree, but they have risen faster than corporate earnings have grown. When that happens, the CAPE ratio goes up.

Here is how the US markets moved over the last three years, taking the CAPE ratio past the 40 mark.

The US market has made several all-time highs and has been bullish for at least the last three years. Since October 2023, the Nasdaq Composite has delivered an annualized return of over 26%, which has doubled investors’ money. Nasdaq moved from around 13,000 to current levels of nearly 26,800 during the last three years.

The S&P 500 has risen at a 21% CAGR, nearly doubling in value too. The index has moved up from around 4,300 to 7,600 during this period. The journey was not smooth, though. Markets corrected big time in March 2025 and then again in March 2026.

How are Earnings Growing

Investors anticipate a strong earnings season as S&P 500 companies prepare to release third-quarter results, with full-year earnings projected to increase by 35%. However, there is a growing concern about whether the companies can maintain this profit growth beyond 2026. US corporate profit growth is expected to moderate in 2027 after the big gains in 2026.

S&P 500 earnings are projected to increase by 15% in 2027, much lower compared to this year, influenced by a deceleration in AI capital spending and other challenges for companies.

Shiller PE Ratio over 50 Years

Source: Multpl

What Happened the Last Time CAPE Was This High?

A historically high Shiller CAPE ratio is generally a flashing warning sign for investors. In 2000, the market crashed nearly 50% over the next few years, after the CAPE ratio reached a high of 44. This time, it has touched 41. Even at current levels, it is uncertain how long the market will keep rising.

A Warning Sign, Not a Crash Call

The Shiller CAPE ratio is essentially telling us that market valuations have gone through the roof. Yet investors are still willing to pay for stocks, or hold on to them, at these higher valuations. Their underlying assumption is that earnings will keep rising.

The Shiller CAPE ratio is sitting near the highest levels Wall Street has ever recorded. But that alone does not mean a crash is coming. The ratio is built on past data, whereas investors look ahead. It also has several shortcomings. Still, the signal is hard to ignore. It makes sense to stay alert and consider rebalancing the portfolio where needed.