This indicator hasn’t flashed this red since the dot-com bubble

Summary

Podcast Summary: "This indicator hasn’t flashed this red since the dot-com bubble"
The Indicator from Planet Money, NPR (Nov 6, 2025)

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Episode Overview

This episode of The Indicator explores the Shiller PE (CAPE) ratio—a stock market indicator that has reached levels unseen since the infamous dot-com bubble of the late 1990s. Hosts Darian Woods and Paddy Hirsch are joined by Charles Schwab’s Chief Investment Strategist Liz Ann Saunders and CAPE’s co-creator, Harvard economist John Campbell, to demystify what the current high CAPE reading means for investors and whether it’s a sign to panic about the market. They also draw parallels between today’s AI investment boom and the internet frenzy of the late '90s.

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Key Discussion Points & Insights

1. What is the Shiller PE (CAPE) Ratio? [02:42–04:48]

• Origin: Developed by economists Robert Shiller (who popularized it) and John Campbell.
  • "I'm not sure why his name is not attached to the metric." — Liz Ann Saunders [03:16]
  • “Well, I think it should be the Campbell Shiller Cape, strictly.” — John Campbell [03:24]
• Definition: CAPE stands for Cyclically Adjusted Price to Earnings. It averages real (inflation-adjusted) earnings over the past 10 years for all S&P 500 companies.
  • "It looks at the average of real earnings over the past 10 years. So it's a much longer historical look back than your standard 12 month trailing earnings..." — Liz Ann Saunders [04:35]
• Purpose: Smooths volatility and provides a ‘normalized’ valuation measure that’s less warped by short-term blips (e.g., pandemic disruptions).

2. What Does a High CAPE Indicate? [05:18–06:27]

• Current State: CAPE is “pretty darn high”—close to 40, not far from its all-time peak of 45 during the tech bubble (2000).
  • “At that time, the ratio peaked at about 45, but the CAPE ratio today is pretty close to 40 and that's higher than it's been at any other time besides the turn of the millennium.” — John Campbell [05:28]
• Long-Term Predictor: CAPE is not meant for short-term market predictions.
  • "This isn't something that's going to tell you, oh, there's going to be a crash tomorrow or even this year. But if you look over 10 years, high values of this ratio are associated with low subsequent 10 year returns..." — John Campbell [06:09]
• Contrast with Popular Usage: Many misread it as an immediate crash alarm; it's actually about decade-long trends.

3. CAPE as a Temperature Check on Investor Sentiment [06:39–07:46]

• Sentiment Indicator: High CAPE reflects market optimism—investors pay more when they’re bullish and confident.
  • “It's sort of taking the temperature of the market, which is lots of enthusiasm and at times there's just less regard for whether the market is expensive or not.” — Liz Ann Saunders [07:34]
• Bubbles & Complacency: Expensive markets can persist; a high CAPE is a yellow light, not a red one.

4. Parallels with the Dot-Com Bubble & Today’s AI Hype [07:57–09:07]

• Market Comparisons: The current climate draws many to compare AI’s explosion with the dot-com era.
  • “There's in general a concern right now about the market being in some sort of bubble, a AI-specific concern. But lots of comps to the late 1990s.com bubble.” — Liz Ann Saunders [07:57]
• Winner-Take-All Dynamics: Not every AI company can win; history suggests only a few will thrive.
  • “They can't all win. There may be one winner, but or even two. But there's not going to be five, six or seven winners.” — John Campbell [08:26]
• Market Concentration: Much current investment is concentrated in a few mega-corporations.
• Uncertainty Factors: Outcomes hinge on competition, regulation, and unknowns about AI’s true potential.

5. Can High Valuations Be Justified? [09:07–09:29]

• Examples: In 1999, Cisco was “ridiculously expensive” but ultimately grew into its valuation.
  • “Companies can grow into their valuations and the market can too.” — Paddy Hirsch [09:07]
• Long-Term Limits: Even so, sustained investor "exuberance" historically fades over a decade.
  • “If exuberance is a state of mind that tends to wear off gradually, then the exuberance that we see today is unlikely to still be there, say in 10 years...” — John Campbell [09:40]

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Notable Quotes & Memorable Moments

• [05:50] Paddy Hirsch: "Whenever you use the word millennium to quantify something in the market, you're pretty much guaranteeing a freak out, in my opinion."
• [06:59] Liz Ann Saunders: “There are times where valuations become very expensive and stay expensive for an extended period of time and the market continues to do well and vice versa.”
• [09:40] John Campbell: "If exuberance is a state of mind that tends to wear off gradually, then the exuberance that we see today is unlikely to still be there, say in 10 years. And that will mean, in all probability that prices will be lower in 10 years, or at least lower in relation to earnings."

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Key Timestamps

• 02:42 – Liz Ann Saunders introduces the CAPE ratio and explains its calculation and purpose.
• 03:24 – John Campbell clarifies his role as co-creator of the metric.
• 05:28 – Current CAPE level contextualized historically.
• 06:09 – Campbell explains CAPE as a long-term, not short-term, predictor.
• 07:34 – Liz Ann Saunders on CAPE as a market sentiment indicator.
• 07:57 – Market concerns about bubbles and AI’s echoes of the 1990s.
• 09:40 – Campbell on the impermanence of market exuberance.

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Tone & Style

The hosts blend clarity and light humor, keeping explanations accessible even for financial novices. Informed guests provide measured caution—neither fearmongering nor dismissive—about what a flashing-red CAPE ratio really means. The mood is both informative and grounded, reassuring listeners not to panic but to remember: market cycles are long, and history is full of both warnings and surprises.

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Bottom Line:
The CAPE ratio being sky-high doesn’t predict an imminent market crash, but over the next decade, it often signals lower-than-usual returns. Today’s marketplace—fueled by AI fervor—bears some resemblance to the dot-com days, but as always, the future is far from certain. Remember: “It can't tell you what's around the corner, only what's potentially over the horizon.”

Transcript

[Darian Woods]

Npr. This is the indicator from Planet Money. I'm Darian Woods.

[Paddy Hirsch]

And I'm Paddy Hirsch. At this point, we can pretty much stipulate that the Internet can be a very scary place. And right now it's particularly scary if you pay close attention to a certain stock market indicator, the that a lot of Internet people are wigging out about.

[Darian Woods]

It's called the Shiller PE ratio and it's at its highest level since November of 1999. So 1999 was a turbulent time. This was the peak of an online gold rush. Investors making big bets on how the Internet was going to change everything.

[Paddy Hirsch]

Heady times, geocities, excite pets.com it all ended up being a huge dot com bubble that burst spectacularly in 2000. And it was actually really scary. You know, the market cratered. Lots of companies went out of business, including the one that I was working at at the time. Pretty soon after the bubble burst, I was out of work. Yeah.

[Darian Woods]

So the scars are real. And because it's a bit scary and because it's an indicator and because this is the indicator, today we're going to look at the Shiller PE ratio. We'll explain what it is and how it works and you whether or not you need to be scared, too. That's coming up after the break.

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[Paddy Hirsch]

The Shiller PE ratio, it was developed.

[Liz Ann Saunders]

By Robert Shiller, who, who is an economist.

[Darian Woods]

This is Liz Ann Saunders. She's the chief investment strategist at Charles Schwab and she quite often consults the ratio, which is sometimes called the cape.

[Liz Ann Saunders]

Cyclically adjusted price to earnings is cape, so it's often shortened to Schiller's Cape.

[Paddy Hirsch]

Schiller's Cape. He's like a stock market superhero.

[Darian Woods]

Yeah, with an acrostic poem to match.

[Paddy Hirsch]

But Schiller didn't come up with this cape concept on his own. Lisanne says there's another hero in this.

[Liz Ann Saunders]

Story, also another economist, John Campbell. I'm not sure why his name is not attached to the metric.

[John Campbell]

Well, I think it should be the Campbell Schiller Cape, strictly.

[Paddy Hirsch]

This is John Campbell, economics professor at Harvard, author of a new book called Fixed and of course co creator of what should be called the Campbell Schiller Cape. He's got no hard feelings, though in.

[John Campbell]

Fairness, Bob Shiller did a lot of work popularizing it and he used it very importantly in his famous book Irrational Exuberance. So in no way do I begrudge the fame that Bob won by doing that.

[Darian Woods]

John and Bob Schiller came up with the cape in the 1990s, just ahead of the dot com crash. It built on the age old method of valuing a company with a PE or price to earnings ratio. Let's go through the explainer, Paddy.

[Paddy Hirsch]

Okay, just a short one. The pe, the price to earnings ratio, is where you divide a company's stock price by its earnings per share. You compare whatever number you get to a bunch of other data about the sector, the company's past earnings, et cetera, and that tells you whether the stock is cheap or expensive or Goldilocks.

[Darian Woods]

The CAPE ratio blows this concept wide open and it applies to the entire s and P500 and not just for the last year of earnings.

[Liz Ann Saunders]

It looks at the average of real earnings over the past 10 years. So it's a much longer historical look back than your standard 12 month trailing earnings that might be in a more standard PE.

[Paddy Hirsch]

Yeah, going back a whole decade takes volatility out of the question. Like if you looked at the PE ratio for just 2020, when the pandemic made a royal mess of the market, you'd get a skewed number. Over 10 years you get a much more accurate picture of the way the market has performed. And CAPE also adjusts for inflation.

[Liz Ann Saunders]

What CAPE does is it kind of provides a normalized measure of how expensive or cheap stocks are relative to their long term earnings power.

[Darian Woods]

A high Cape number means stocks are expensive and a low number means they're cheap. Right now, John says the number is pretty darn high.

[John Campbell]

It is close to a record level. It's not quite as high as it was at the peak of the technology boom in the year 2000. At that time, the ratio peaked at about 45, but the CAPE ratio today is pretty close to 40 and that's higher than it's been at any other time besides the turn of the millennium.

[Paddy Hirsch]

Okay, I'm sorry, but whenever you use the word millennium to quantify something in the market, you're pretty much guaranteeing a freak out, in my opinion. But before we all lose our minds, John says if you're looking to the Cape number to tell you what's going to happen in the market tomorrow or in the next few weeks or even the next few months, you'll you are looking at the wrong dial on the dash.

[John Campbell]

This isn't something that's going to tell you, oh, there's going to be a crash tomorrow or even this year. But if you look over 10 years, high values of this ratio are associated with low subsequent 10 year returns. And low values of the ratio are associated with high values.

[Darian Woods]

In other words, when the Cape number is high, returns tend to be lower over time and when the number is low, returns tend to be higher again over time. This is a long term predictor.

[Paddy Hirsch]

But Liz Ann says that is not the way that a lot of people are reading the Cape right now. No, they are seeing the number they're remembering or looking at charts that show how the market fell out of bed the last time it was that high before the dot com crash. And oh my God, they're predicting a wipeout. And that is just not the way the ratio works.

[Liz Ann Saunders]

The market can sometimes get on a roll and buck what on paper anyway would often be seen as a contrarian signal from some of these indicators. There are times where valuations become very expensive and stay expensive for an extended period of time and the market continues to do well and vice versa.

[Paddy Hirsch]

The Cape, she says, works best as a gauge of investor sentiment. If investors are feeling flush and confident and bullish about the future, they'll be willing to pay more for stocks.

[Liz Ann Saunders]

It's sort of taking the temperature of the market, which is lots of enthusiasm and at times there's just less regard for whether the market is expensive or not.

[Darian Woods]

And she says right now the market is expensive regardless of what indicator you choose to look at. And that's just one thing giving market strategists like her concern.

[Liz Ann Saunders]

There's in general a concern right now about the market being in some sort of bubble, a AI specific concern. But lots of comps to the late 1990s.com bubble.

[Paddy Hirsch]

The comparisons are pointed, John says. As with the Internet in the late 90s, a lot of companies are pouring a lot of money into a nascent technology with AI, and none of them have a real idea of what just AI might or might not be able to achieve.

[John Campbell]

They can't all win. There may be one winner, but or even two. But there's not going to be five, six or seven winners.

[Darian Woods]

It's not at all clear what competition or regulation or politics might do in the race to adopt and monetize AI. John says the picture is complicated by the fact that much of the investment is coming from just a few big corporations that actually take up a third of the market.

[John Campbell]

We're in a strange time where you have a mix of excitement about the prospects for AI and optimistic narratives about what AI may do to growth, and also a lot of apprehension about AI and its disruptive potential.

[Paddy Hirsch]

Yeah, and something similar happened before the dot com bubble burst also. But high valuations aren't necessarily off base. Like back in 99, for example, Cisco Systems had a price to earnings ratio of nearly 200. I mean, that's ridiculously expensive. But guess what? It ended up being a good bet. Companies can grow into their valuations and the market can too.

[Darian Woods]

And this is why Liz Ann and John say that even though the CAPE ratio is the highest in a quarter century, it can't tell you anything about what's right around the corner 10 years down the road.

[John Campbell]

On the other hand, if exuberance is a state of mind that tends to wear off gradually, then the exuberance that we see today is unlikely to still be there, say in 10 years. And that will mean, in all probability that prices will be lower in 10 years, or at least lower in relation to earnings.

[Paddy Hirsch]

Well, with the caveat that neither Darian nor I are specialists in personal finance and that nothing in this episode constitutes investment advice, please do, listener. Come back to us in a decade and we'll see how we all did.

[Darian Woods]

That'[e-mail] looking forward to seeing you.

[Paddy Hirsch]

This episode of the Indicator was produced by Cooper Katz McKim and engineered by Kwesi Lee. It was fact checked by Tyler Jones. Kate Concannon is our editor and the Indicator is a production of npr.

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