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

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.

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]

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."

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.

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.

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.”