Sensitive moment, repeated alarms in the US stock market! The famous valuation indicator has crossed the red line for the "second time in history"—the last time was in 1999.

Sensitive moment, repeated alarms in the US stock market! The famous valuation indicator has crossed the red line for the "second time in history"—the last time was in 1999.

```

A classic valuation method pioneered by legendary investor Benjamin Graham and popularized by Nobel laureate economist Robert Shiller is sending a clear signal to the market: In the coming years, lower your expectations for returns.

According to the latest report from The Wall Street Journal, the indicator known as the "Cyclically Adjusted Price-to-Earnings ratio" (CAPE or Shiller P/E) has recently broken above the 40 mark. This is only the second time the indicator has reached such heights on record, with the only previous occasion being in 1999, at the peak of the tech bubble. This development sounds a warning for the current booming U.S. stock market.

Historically, peaks in the Shiller P/E have often signaled poor future market performance. Data shows that after the valuation peaks in 1929, 1966, and 2000, U.S. stocks recorded negative real (inflation-adjusted) returns over the subsequent decade. This historical pattern has led investors to seriously question the sustainability of current valuations.

Although the price-to-sales ratio of U.S. stocks has also risen to historical highs, the warning sign from the Shiller P/E carries particularly heavy weight. There is mounting tension between the market's optimism and the cautious signals emitted by historical valuation models.

Valuation Alert: Historic Threshold of "40"

The Shiller P/E measures stock prices by reviewing the average inflation-adjusted earnings over the past ten years, aiming to smooth out the effects of the business cycle and provide a more robust valuation perspective. Its long-term historical average is about 17 times.

Even taking into account changes in the modern economic structure and moving the statistical starting point to 1990, when computers and financial media became widespread, its average value is just 27 times.

Analysts note that the current level above 40 is at an extremely high range by any measure, meaning current stock prices are at levels unseen in 99% of historical periods.

"This Time Is Different"? High Valuations Spark Debate

There are voices in the market defending high valuations. One view holds that today's index constituents have "higher quality," with companies like Microsoft, which are asset-light and have high profit margins, taking up much more weight than before. However, this explanation is somewhat unconvincing when confronted with the "gold standard" of the Shiller P/E.

Another optimistic expectation is pinned on the productivity revolution brought by artificial intelligence (AI).

However, analyses point out that AI's impact must be "truly transformational and lasting" for valuations to revert to historical averages. Additionally, the view that corporate profits will continue to grow faces challenges, because current U.S. corporate tax rates and labor costs are low—trends that are unlikely to be sustained and may even reverse, especially in the context of large government deficits and an aging population.

"Tech Magnificent Seven": Real Returns Expected to Be Negative Over Next Decade

It is important to note that the Shiller P/E is not a precise market timing tool, and high valuations can persist for a long time. But it is an important reference for alerting investors to long-term risks. Analysts believe that current high valuations will eventually require correction, and that a decline in price (P) is more likely than unexpected growth in earnings (E).

Nevertheless, there are still some opportunities beneath the warnings. Forecast models from index developer Research Affiliates, based on the Shiller P/E, show significant divergence in expected returns among different asset classes. According to their estimates, over the next ten years:

  • U.S. large-cap growth stocks, including the "Tech Magnificent Seven," are expected to have a real annualized return of -1.1%.
  • U.S. large-cap value stocks are expected to achieve a positive return of 1.6%.
  • Brighter prospects are seen for U.S. small-cap stocks, European stocks, and emerging market stocks, with expected real annualized returns of 4.8%, 5.0%, and 5.4% respectively.

Risk Warning and DisclaimerMarkets have risks, investment should be done cautiously. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions herein are suitable for their individual circumstances. Invest accordingly at your own risk. ```