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For charts and live links go to https://discussion.fool.com/t/control-panel-valuat...


Stock valuations are expressed as a P/E ratio. When prices rise the P/E ratio rises if earnings stay the same or decline. When earnings rise the P/E ratio declines if prices decline or rise more slowly than earning.

I post the chart of CAPE (Price - to- earnings ratio of the S&P 500 based on average inflation-adjusted earnings from the previous 10 years) every week. This chart smooths out the volatility caused by short-term factors to show the underlying valuation of the stock market going back to 1870. Of course, the SPX has changed over the many decades but it does give data on the shifting levels of market valuations in good times and bad. The median CAPE is 16. The current CAPE is 40. The bubble resembles the bubbles of 1929 and 1999, even to the underlying excitement and immense borrowing to finance new technologies that wouldn’t pay off for many years ahead.

Multpl
Shiller PE Ratio - Multpl

Shiller PE Ratio chart, historic, and current data. Current Shiller PE Ratio is 40.44, a change of +0.50 from previous market close.

METARs and other investors are feeling flush this week as the SPX reaches another record high despite the uncertainty over the war with Iran.

Note that the P/E chart below is a short-term chart, not the 10-year moving average chart linked above.

https://www.wsj.com/finance/stocks/the-record-stoc...


The Record Stock Market Rests on Some Big One-Offs
There are two significant reasons earnings expectations have soared—and they are both probably temporary

By James Mackintosh, The Wall Street Journal, April 18, 2026

It’s six months, give or take, since AI excitement drove stock valuations above their 2020 bubble high to reach the highest since 2000, the peak of the dot-com bubble.

Something odd has happened since: Valuations, measured as the price-to-earnings or PE ratio, have plunged, while stocks rose to a record high this week.

This isn’t just unusual. It is unprecedented in data back to 1985. Valuations have never fallen so much over six months without stocks falling too…

The reason for the recent drop in valuation is also unusual: The E part of the PE ratio, companies’ expected earnings, has soared. Because stock prices have made only small gains—the S&P 500 is up 3% from its high in October—the PE ratio has dropped, meaning shares are less expensive than back then. …

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This time, there are two big reasons earnings expectations have soared—and they are both probably temporary. The first is that microchip prices have soared because of huge artificial-intelligence demand. The second is the war in Iran, which has given energy companies a huge boost…

A valuation based only on the next 12 months doesn’t tell us whether to buy or sell, because a slowdown is likely only the year after, or further out…

Current prices for both the AI stocks and oil are based on the market’s best guess for the two themes of the moment: Data-center building and the Iran war. This has made the market look cheaper than before. But it wouldn’t take much—the AI boom’s turning to bust or a peace deal in the Gulf—to make today’s cheapness look expensive in retrospect… [end quote]

I won’t say anything about the war in Iran and the situation in the Strait of Hormuz because it’s unpredictable. If the Strait of Hormuz opened today, it would take several weeks to two months for significant oil supplies to reach buyers, especially in Asia-Pacific, rather than days. And who knows when shipping will start again? It may take months to restore oil field output, as many fields, particularly those shut down for weeks, require complex technical restarts.

The stock market seems to be shrugging off the impact of an oil supply shock. It’s almost as if traders are so confused by the uncertainty that they’re just ignoring it and going back to business as usual.

Stock indexes rose to records. VIX is down. Bullish percent is up. The Fear & Greed Index is in Greed. The trade is risk-on as the price of SPX and junk bonds are rising faster than the 10 year Treasury price.

The Treasury yield curve fell slightly last week. The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, showed looser financial conditions. Financial stress fell. The looser financial conditions provide the money to juice the markets.

Gold, silver, copper and bitcoin rose. USD, oil and natgas fell. USD is near the bottom of the channel that began in January 2023 which is at a relatively strong level.

The Atlanta Fed’s GDP Now (growth rate of real gross domestic product (GDP)) estimate for 2Q26 was 1.3% on April 09, 2026. Though not predicting a recession, this is a quick decline from the optimistic estimate over 3% in early March, before the U.S. and Israel attacked Iran.

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The Cleveland Fed’s Inflation Nowcast predicts increasing inflation. Note the difference between CPI and PCE compared with the Core CPI and PCE which exclude energy and food prices – as if none of us use energy or food.

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With the Fed predicting stagflation there’s little chance the fed funds rate will be cut. The options market predicts no chance until September and then a 66% chance that the Fed will hold steady. The FOMC will hang tight even though Jerome Powell will be replaced as Chair next month. If Kevin Warsh, the new chair, pushes hard for a fed funds cut the FOMC will ignore him and his reputation would be damaged since it’s obvious that would be against longstanding Fed policy.

The markets have built this into their models so there’s no reaction.

The METAR for next week is sunny.

Wendy
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Quickly and easily view and analyze mini-charts of up to 12 different symbols simultaneously, all displayed side-by-side on a single page
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CandleGlance | StockCharts.com

Quickly and easily view and analyze mini-charts of up to 12 different symbols simultaneously, all displayed side-by-side on a single page
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CandleGlance | StockCharts.com

Quickly and easily view and analyze mini-charts of up to 12 different symbols simultaneously, all displayed side-by-side on a single page
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Fear and Greed Index - Investor Sentiment | CNN

CNN’s Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The index uses seven market indicators to help answer the question: What emotion is driving the market now?
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Dynamic Yield Curve | StockCharts.com

Visualize the relationship between interest rates and stocks over time using our draggable, interactive yield curve charting tool.
chicagofed.org
National Financial Conditions Index: Current Data - Federal Reserve Bank of...
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St. Louis Fed Financial Stress Index

St. Louis Fed Financial Stress Index
atlantafed.org
GDPNow

GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the US Bureau of Economic Analysis.
fred.stlouisfed.org
Nominal Broad U.S. Dollar Index

Nominal Broad U.S. Dollar Index
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Inflation Nowcasting

The Federal Reserve Bank of Cleveland provides daily “nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the Consumer Price Index (CPI). These nowcasts give a sense of where inflation...

https://www.cmegroup.com/markets/interest-rates/cm...

Stock indexes rose to records. VIX is down. Bullish percent is up. The Fear & Greed Index is in Greed.

As discussed in anther thread, the accuracy of the information available to we peons is subject to dispute. We keep seeing clear cases of one party asserting one reality, and the counter-party to the same situation being 180 degrees out of sync. We are seeing Baghdad Bob levels of disinformation/delusion, by someone, but we can't be sure who.

Steve

There was a major accounting change around 1991, and so I double the Shiller CAPE values before 1991 when doing historical comparisons. With that adjustment, the recent CAPE value is within the historical range, but is high.

adjCAPE on Date
63 on July 1929
48 on Oct 1965
44 on Nov 1999
40 on Apr 2026

"There was a major accounting change around 1991, and so I double the Shiller CAPE values before 1991 when doing historical comparisons."

Please post a link to this information.
Wendy

From ChatGPT. The last sentence summarises.

Aussi

The CAPE ratio (Cyclically Adjusted Price-to-Earnings)—popularized by Robert Shiller—uses 10-year average real earnings. Because it relies on reported earnings, accounting rule changes can materially distort it, even if the underlying economy hasn’t changed.

Here are the key accounting changes that affect CAPE and how they bias it:

⸻

1. Changes in GAAP Earnings Definitions (More Conservative Reporting)

* Over time, Financial Accounting Standards Board (FASB) has pushed toward more conservative earnings recognition.
* Examples:
* Faster recognition of losses
* Stricter impairment rules
* Effect on CAPE:
↓ Reported earnings (especially in downturns) → ↑ CAPE (appears more expensive)

👉 This is one of the biggest structural reasons modern CAPE looks higher than pre-1990 levels.

⸻

2. Treatment of Write-downs & Impairments (Goodwill, Assets)

* Modern rules require companies to write down goodwill and intangible assets when impaired.
* These write-downs:
* Can be large
* Are often one-time but included in earnings
* Effect on CAPE:
* Large negative earnings during crises (e.g., 2008)
* Depresses the 10-year average earnings
→ Artificially inflates CAPE for years afterward

⸻

3. Shift from “Operating Earnings” to “Reported Earnings”

* Earlier decades often emphasized smoother operating earnings.
* CAPE uses reported (GAAP) earnings, which are:
* More volatile
* Include one-time charges
* Effect on CAPE:
* More volatility → lower average earnings → higher CAPE

⸻

4. Stock-Based Compensation (Expensing Options)

* Before early 2000s:
* Stock options often not expensed
* After rule changes:
* Must be expensed as a cost
* Effect on CAPE:
↓ Earnings (especially in tech-heavy indices)
→ ↑ CAPE relative to earlier periods

⸻

5. Pension Accounting Changes

* Firms now must:
* Recognize pension deficits more transparently
* Mark assets/liabilities closer to market
* Effect on CAPE:
* Adds volatility to earnings
* Often reduces reported profits
→ pushes CAPE higher

⸻

6. Revenue Recognition Changes

* New standards (e.g., ASC 606):
* Change timing of revenue recognition
* Effect on CAPE:
* Can shift earnings across years
* Alters the 10-year average baseline

⸻

7. Increased Use of Fair Value Accounting

* More assets marked to market instead of historical cost
* Effect on CAPE:
* Earnings become more cyclical and volatile
* Crisis periods show sharper losses
→ lowers average earnings → raises CAPE

⸻

8. Tax Law Changes (Indirect Effect)

* Changes in corporate tax rates affect after-tax earnings
* Example: lower tax rates → higher earnings
* Effect on CAPE:
↑ Earnings → ↓ CAPE
(but this is economic + policy, not pure accounting)

⸻

Big Picture Insight

The key pattern:

Modern accounting tends to depress and increase volatility of reported earnings relative to the past.

That means:

* Today’s CAPE is not directly comparable to early 20th-century CAPE
* A “high CAPE” today may partly reflect accounting evolution, not just overvaluation

⸻

Practical Implications for Investors

* Comparing CAPE across eras without adjustment can be misleading
* Some analysts:
* Adjust earnings to remove one-time write-downs
* Use NIPA profits (national accounts) instead of GAAP
* Or compare CAPE only within the modern accounting regime (post-1990)

⸻

Aussi, thank you for sharing your research on the question of whether pre- and post-1990 CAPE are comparable. Even if they are not directly comparable, the data after 1990 (though a relatively short 36 years) still shows a bubble which is comparable to the dot-com bubble in 1999. Even more concerning, the speculative excess spending on infrastructure that would not pay off profitably for many years (fiber optics in 1999, data centers in 2026) is very similar. This pattern also drove the 1929 bubble and the earlier bubbles which are described in the book "Manias, Panics and Crashes."

It's very concerning that the rapid increase in the S&P500 over the past couple of years has been driven by a handful of tech companies which are now taking on immense debts to build data centers and whose profits are largely from sales to each other, rather than to paying end-users.

https://www.multpl.com/shiller-pe

Wendy

The key stock based compensation change was mandated in 2005 (requiring it to be counted as a cost by removing loopholes), now enshrined at ASC 718. It requires a material adjustment.

E.g., see below for an attempt to measure the adjustment required:

https://manuinvests.substack.com/p/the-broken-yard...

lizgdal wrote: There was a major accounting change around 1991, and so I double the Shiller CAPE values before 1991 when doing historical comparisons.

Wendy wrote: Please post a link to this information.

No links, just an observation after looking at the CAPE data. The data shows a break around 1992, and there were various FASB accounting changes around that time.

A thought experiment: were new investors better off in 1929 or 1999? CAPE says the 1999 bubble was far worse, but the returns after the bubbles burst were far worse in 1929. Was this just random luck, or does CAPE need an adjustment?

Total returns for the S&P 500 index equivalent, for the 10 years following peak CAPE dates:

CAGR  TR   GSD  MDD    From    CAPE      To     CAPE   ratioCAPE
 -5   -37  45   -85  19290913  32.56  19390915  16.45     51%
 -1   -5   21   -55  19991215  44.20  20091215  20.32     46%
 
                       ratio   1.36             1.24

CAPE was 36% higher in 1999 compared to 1929, and yet subsequent 10-year total return was -37% following 1929, and -5% following 1999. In both cases, CAPE values fell, but 10 years after the bubbles burst the 2009 CAPE was still 24% higher than the 1939 CAPE.

The 1930's stock market was much more volatile than the 2000's stock market. Maximum drawdown in the 1930's was 85%, while maximum drawdown in the 2000's was -55%. Both unpleasant, but the 1930's were clearly worse. Why doesn't the CAPE reflect this?

Recovery time was longer following the 1929 crash. Using Shiller's CAPE data, the time to recover after Real TR Price peaks:

         Real TR
  Date    Price
1929.09   12655
1945.10   12684
  16.0    years   recovery
 
2000.08  1207059
2013.05  1256426
  13.0    years   recovery

From a M* article:

Rank  %Decline   Peak   Trough  Recovery                          Event
  1      79     Aug-29  May-32   Nov-36               1929 Crash & Great Depression
  5      50     Feb-37  Mar-38   Feb-45                 Great Depression & WWII
 
  2      54     Aug-00  Feb-09   May-13   Lost Decade (Dot-Com Bust & Global Financial Crisis)
 
  3      52     Dec-72  Sep-74   Jun-83             Inflation, Vietnam, & Watergate
  4      51     Jun-11  Dec-20   Dec-24                     WWI & Influenza
  6      37     May-46  Feb-48   Oct-50                   Postwar Bear Market
  7      36     Nov-68  Jun-70   Nov-72                 Inflationary Bear Market
  8      34     Jan-06  Oct-07   Aug-08                       Panic of 1907

link has a chart of Market Crash Timeline: Growth of $1
from https://www.morningstar.com/economy/what-weve-lear...

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