I pulled this chart from Professor Shiller’s publicly available CAPE file on his Yale website. I found it to be striking simply for the fact the spread between the current S&P 500 index level and composite earnings appears to be so much wider now than it did in 1999/2000. The rise has been truly spectacular. I wonder if the fall will be equally spectacular?
For now, volatility is back en vogue but fundamentals (economic data points, earnings, etc…) don’t appear to be flashing any warning signs yet. I guess we will have to see if this correction turns out to be something more than your run of the mill correction. With earnings season starting in earnest next week, we should gain more clarity in short order. Based on current sentiment, any earnings disappointments probably aren’t going to be too well received.
Note: Composite earnings in the chart are monthly data points, not the aggregate ten years used in the denominator of CAPE ratio.