Could the most reliable method of long-term stock price estimation be signaling today’s warning in the way it flashed just ahead of the dot.com bubble burst? The S&P 500’s Cyclically Adjusted Price to Earnings ratio, or Shiller CAPE, is now at 39.4, a level last seen in excess of two decades ago and only reached in the late 1920s and in the tech bubble era at the start of this century. For those who follow the cycles of the markets, this is no mere statistical anomaly it is a convergent point of extremes in both price and story.
The CAPE, or cyclically adjusted price-to-earnings ratio, using calculations by Robert Shiller, smooths out earnings figures over a ten-year period and adjusts for inflation in order to remove any short-term market anomalies. Currently, it indicates that at current market values, stocks are trading at almost forty times average inflation-adjusted earnings, which, according to Robert Shiller’s forecast formula, correlates with average annual total return values of 1.5% over the next decade, implying a possible future change in the level of the index negatively, based on historical dividend yield adjustments of 2%. The forecast, therefore, as stipulated in Robert Shiller’s confidence interval, indicates annualized returns between -7.7% and 10.7%; however, one thing that hasn’t been in question is that, relative to historical standards, stocks are expensive.
This time around, it’s fueled by artificial intelligence, which has already made an economic impact. Unlike in the dot-com days when valuations were driven purely by hype, current leaders in this space have scaled businesses that generate billions of dollars in semiconductor, cloud, and enterprise softwares. The extent to which this industry has disrupted this space has been exemplified by the fact that Nvidia’s market capitalization has surged to $4.3 trillion. This has impacted the S&P 500 positively with an increase of 70% over three years with spreading gains to energy, industrial, and infrastructure sectors.
The market’s course in 2025, however, has been far from smooth. The tariff shock of “Liberation Day” on April 2, marked by Executive Order 14257, led to a quick repricing cycle in different markets. Event studies reveal that the S&P 500 index declined by 11% over two days, with sector such as energy losing 17% in abnormal returns, and financials experiencing a rise in credit default swap spreads. The dividend futures of S&P 500 declined by 6-8% over three years, which is a clear estimate that the market believed the shock of tariffs would act as a perennial deterrent to corporate profits. The foreign exchange market was also filled with a similar concern, with safe-haven currencies appreciating against the U.S. dollar, and risk-sensitive currencies deprecicating, which is a projection of a global rebalance away from U.S. markets.
Although the market has had a rebound, BNZ believes it is weakening as it’s based on an unusual valuation ratio. The extreme ratio indicates that the market could be in trouble because a similar ratio was recorded in 1999. After breaching the ratio of 40 in 1999, the S&P market took a crash of 49% in the next two years. It happened after the late 1920s market as well, but it was even more severe.
What about the “buy the dip” approach for investors pondering a strategy? In an exhaustive research project involving dip buying strategies for the time period from 1965 to the year 2025 involving 196 different strategies, AQR Capital Management determined more than 60% of the strategies underperformed a passive approach on a risk-adjusted basis with only an average alpha of 0.5%. The problem with timing strategies like dip buying is they often conflict with short-term momentum stock responses, which show persistence. Trend strategies outperformed with a 4.7% alpha in significant drawdown periods with average returns of +28.6% in the four worst declines in the S&P index since the year 2000.
The April 2025 episode presents a case study. Investors netted a record $4.7 billion into stocks in one trading session, expecting a rapid recovery. However, the fundamentals, as indicated by dividend futures, continued to decline in tandem with prices, implying that the market was not necessarily “cheaper” in a fundamental sense. Market volatility was high, with VIX reaching 50, which is generally a level signaling greater potential for returns but also a higher risk profile.
However, his advice leads to a diversification. Here, European stocks and Japanese stocks are undervalued, as CAPE measures 21.4 and 25.1, yielding average annual returns over the coming decade of 8.2% and 6.5%. Mid-cap stocks or small-cap stocks in America are also relatively less overvalued, providing an opportunity to invest without touching sky-high prices.
The move into the historical danger zone, together with the concentrated impact of AI and the macro-shock driven by trade policy, now presents a market environment in which caution is fundamental. For investors alert to valuation cues, the similarity with previous bubbles cannot be denied and despite the technological tale being stronger than ever, the parallels are striking.
