Must-know: What Shiller’s P/E ratio of the S&P 500 suggests

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It is true that other metrics paint a more negative picture. The Shiller P/E ratio, a cyclically adjusted price-to-earnings (or CAPE) ratio, suggests U.S. stock valuations are slightly expensive. However, today’s levels are not yet in the nosebleed territory that characterized the 2000 Internet bubble stocks and aren’t yet at a level that suggests negative returns over the long term.

Market Realist – The graph above shows Shiller’s price-to-earnings (or P/E) ratio, or CAPE, over the last 20 years for the S&P 500 (SPY)(IVV). The graph also shows its average. The Shiller P/E ratio measures the current price of an index or security relative to its average earnings over the past ten years.

The current ratio stands at 25.7x. It’s slightly shy of its 20-year average of 26.8x. At the peak of the technology (XLK)(QQQ) bubble in 1999, the ratio stood at a whopping 44.2x. However, the current ratio of 25.7x is higher than the ten-year average of 22.91x.

Please read the next part of the series to learn if you should invest in small caps (IWM).

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