S&P 500 valuation soars – approaching dot-com levels

Valuation approaching historical extremes

The valuation level of the American stock market, as measured by Shiller's CAPE ratio (Cyclically Adjusted Price-to-Earnings), has now climbed to its second-highest level since measurements began in 1881, writes Nasdaq Markets (nasdaq.com). Only the peak during the dot-com bubble in December 1999, when the ratio reached 44.20, has been higher.

The CAPE ratio, developed by Nobel laureate Robert Shiller at Yale, adjusts the price of the S&P 500 against average inflation-adjusted earnings over the past ten years. The method is designed to smooth out short-term fluctuations in corporate earnings and provide a more stable picture of the market's long-term valuation than a standard P/E ratio, according to data available via Yale's economics department (econ.yale.edu/~shiller).

What history shows about high levels

The last few times the CAPE ratio has been at similar levels, the subsequent outcome for the stock market has been challenging. After the 1999 peak, the S&P 500 fell by around 49 percent over the following two and a half years, according to data from the Shiller dataset. Before the Wall Street crash in 1929, CAPE stood at 32.56 — significantly lower than today's level.

For dividend stocks, this is particularly relevant. Historically, periods of extremely high valuation have made it harder for companies to maintain dividend growth in line with share prices, as pricing runs ahead of earnings development. This weakens the effective dividend yield investors can expect to retain over time.

From dividends to buybacks

Shiller and co-author Farouk Jivraj introduced an adjusted version of the CAPE ratio in 2018 — Total Return CAPE — precisely to account for the fact that American companies are increasingly prioritizing share buybacks over cash dividends. This makes comparison with historical dividend periods more complicated, but at the same time underscores that today's high pricing is not necessarily fully reflected in traditional dividend figures.

Norwegian angle: The oil fund's exposure

Norges Bank Investment Management (NBIM), which manages the Government Pension Fund Global, has a significant share of the fund's equity portfolio placed in American companies, including large holdings in the S&P 500 index. A market correction from today's valuation levels could therefore directly affect the fund's overall return, given the heavy US weighting in the portfolio.

The risk picture and the connection to the crypto market

In today's market regime, classified as "risk-on" with a Fear & Greed Index of 70 out of 100, high-risk assets such as bitcoin (currently around $84,355) are increasingly trading in sync with American technology and growth stocks. Analysts following crypto often point to Shiller's dot-com peak from 1999 as a reference point when assessing how "late in the cycle" today's risk assets are.

It is worth emphasizing that the CAPE ratio is a long-term valuation measure, not a timing indicator. Historically, markets have been able to remain at high levels for several years before a correction occurs. According to the Yale dataset, CAPE stayed between 38 and 41.4 during parts of 2021 without an immediate crash. Investors should therefore interpret today's levels as a signal of increased long-term risk rather than a precise warning of an imminent decline.

Summary

Today's CAPE level places the American stock market in the company of only one previous period in history — the dot-com bubble. For dividend investors and managers with heavy US exposure, such as the Norwegian oil fund, this is a reminder that high pricing has historically gone hand in hand with weaker future returns, even though the timing of any correction remains uncertain.