A popular indicator among analysts for the long-term assessment of the U.S. stock market is currently 5% below the peak reached during the dot-com bubble of the late 1990s, according to Yahoo Finance. If this indicator goes above that level, the stock market will become the most expensive in history, the publication notes.
What the indicator shows
The Shiller P/E ratio, named after its creator Nobel laureate Robert Shiller, is also known as the 'cyclically adjusted P/E'. The standard P/E indicator reflects the ratio of a company's stock price to its projected annual earnings, but can also be calculated for the entire S&P 500 index or individual sectors. The Shiller multiplier compares the index's value to the average real earnings of the companies within it over the past 10 years, adjusted for inflation, thus smoothing out short-term fluctuations in financial metrics.
It's considered one of the key indicators for the long-term valuation of the US stock market: the higher it is, the pricier stocks look by historical standards. Right now, the indicator is at 42.18, reports Yahoo Finance. Before the dot-com bubble burst, it peaked at 44, and the average over the last 100 years is around 16-17.
Is the AI bubble about to pop?
Although on May 15 the markets experienced a major sell-off, overall they switched to a rapid growth mode in May. Investor sentiment improved thanks to a combination of a strong earnings season confirming robust investments in AI infrastructure and some easing of tensions around the conflict with Iran.
The massive build-out of data centers for artificial intelligence is currently supporting economic growth in the US, explains Yahoo Finance. The market expects that the largest AI chipmaker, Nvidia, will report impressive results next week.
But what the market doesn't know—and this is a risk that investors may be underestimating—is how the new Fed chair Kevin Warsh will react to the acceleration of inflation in the country, emphasizes Yahoo Finance. If anything is likely to trigger a sharp overheating and subsequent market crash in the near future, it’s Warsh's more hawkish stance than expected right after taking office, the publication notes. "Inflation remains a concern in the outlook and could become a problem for the entire market," warned Northwestern Mutual's Chief Investment Officer Brent Schutte.