Monday Takeaways: CAPE Ratio Screams Caution as Rally Continues

Shah Gilani|September 22, 2025

I’ve been riding this bull market hard since April…

But Nobel Prize-winner Robert Shiller’s valuation metric just flashed a major warning.

The CAPE ratio – the cyclically adjusted PE based on trailing 10-year earnings – just hit 40x.

For context, the last time we were near these levels? Right before the dot-com crash, when CAPE peaked at 44.2.

We’re just 11% away from that bubble territory.

Add in these frothy conditions:

• S&P forward PE at 30x vs. 22.2 historical average
• Tech valuations 34% above 20-year norms
• Analysts expecting unrealistic 13-15% earnings growth

I’m not calling a crash – I’m calling for smart risk management.

Click on the image below to learn why I’m keeping my stops tight while staying in this game.

Transcript

Hey, everybody. Shah Gilani here with your Monday Takeaways, and I have been very bullish for quite some time now. Certainly since what I’m calling the tariff tantrum meltdown in early April. On the rebound, I became very bullish early, including buying a whole bunch of stocks on April 7th.

So I’m continuing to add on the way up. My services are also continuing to add on the way up. Very bullish. It’s been an everything rally.

Last week, we saw another record high. We saw gold making new highs, and it’s really an everything rally. Crypto is doing okay for the most part, but we’ve got meme stocks moving. We’ve got all kinds of names moving.

We’ve got stuff across the board. Now we’re seeing small caps move and catch up, making a new high. So depending on the index you look at, there’s pretty much bullishness everywhere.

That’s the takeaway from what’s been happening and certainly the takeaway from last week. But this takeaway is going to be a little more conservative because what I want you to take away from all this bullishness – again, which I’ve got to say I am part of because I have been advocating for this bull market and adding to positions and riding the tiger – but I’m starting to get cautious, and I’ll tell you why.

Because the S&P CAPE ratio now – the CAPE ratio, often called the Shiller PE, is the cyclically adjusted PE ratio of the S&P 500 based on trailing 10-year earnings. So the CAPE ratio has been running over the last 10 years at about 27.25. So the PE based on CAPE on the S&P trailing 10-year cyclical is 27.25. Now that sounds high, and I’ll get to relatively why that sounds high to other measures, but that’s the way CAPE is calculated.

But that’s not the story. The story is, today, we’re trading at 40x. So the last 10 years averaged 27.25. Now we’re trading at 40x on the CAPE ratio. Now the last time we traded anywhere near this was right going into the dot-com bubble bursting.

So what did the CAPE reach at the height of the bubble before it burst? 44.2. We’re at 40 now. So that 44.2 is 11% higher than where we are now.

The takeaway is things are getting frothy by that measure, and that’s an important measure because Shiller is a Nobel Prize-winning economist.

The CAPE or Shiller PE is followed by a lot of conservative money managers who are trying to value the market on a more conservative basis. Now the S&P, which is generally calculated in terms of PE on a forward basis based on the consensus of analyst estimates for forward earnings for the S&P, typically trades for the last decade between 17.5x and 20.2x.

Right now, based on the 12-month forward earnings estimates, the S&P is trading at 29.8x. Let’s call that 30x.

So if you take the good years in the last decade and you eliminate some of the bad years, that PE will probably be closer to the 22.2 level than the number I just gave you. Again, that ratio – when people talk about what has been the historic modern 10-year-plus PE on the S&P on a forward basis, it’s been between 17.5 and 20.2. But when I calculate it using the good years, it’s closer to 22.2. So even if we use 22.2, it’s a pretty good valuation based on the fact that tech is powering the market. Tech still has growth. Tech has the earnings growth, and that’s what matters.

So okay. Not so bad. 22.2. Pretty good. But now we’re at 30.

Takeaway, again, even by that measure, we’re pretty frothy. And as far as looking frothy on estimates, analysts are raising their expectations for out-year earnings to the point where some analysts are talking about – based on forward consensus earnings going out two years – the S&P is actually trading at 19x. Nineteen times forward consensus estimates, these jacked-up estimates. How jacked up? Well, to get to 19 today based on forward earnings, the S&P would have to grow its earnings in 2026 by 13%. That’s doable, but it’s pretty hard. It would have to grow its 2027 earnings by 15%.

Those two together to get to 19x today on those forward earnings is just a little crazy because the average compounded annual rate for earnings growth over the last decade is 8.5%. So analysts are throwing out expectations of 2026 to be something like 13% and then 15% in 2027. That’s frothy.

So I’m concerned about analysts raising their estimates and looking at the PE today at 19 based on those crazy expectations for insanely robust earnings growth. And I scratch my head and say, we’re getting a little frothy here in terms of thinking too – not just the actual numbers, but the thinking going into forward earnings. So takeaway, I’m concerned.

And another thing that matters is tech, which is the thing that matters the most to me because that’s what’s been driving the markets for a decade going on two now. But really, it’s been big tech growing rightfully so – huge earnings, huge profitability, tons of cash being generated, etc. So they still have gigantic growth potential, but they’re trading expensively. They’re trading at a 30x multiple to forward earnings. That’s rich.

Right now, 29.8. That’s the PE on big tech. That’s 34% higher than the average of the last 22 years.

The average, as I said, which I calculated at 22.2. So not even going by the highs of the range of 17.5 to 20.2. I’m adjusting it higher for good years, and I’m saying that should be more like 22.2, which makes more sense the way I calculate it. So trading now at 29.8 – call it 30 PE – versus 22.2 over the last decade, that’s rich.

Point being is, yes, tech is still driving the market, but we’re getting frothy. The takeaway for you today is keep on trucking, but just make sure you have stops in there. Make sure you are keeping an eye on things because there’s going to be increasing valuation talk. I’m laying down the hammer now and betting that starting this week, we’re going to start to hear more and more about valuation metrics being stretched.

And when we get to a point where that becomes the front-page narrative, then people are going to start to wonder, should they take profits? And maybe they adjust their stops, and if things come down a little bit, those stops get hit. My point to you as a takeaway is be careful out there because we are frothy, and I don’t want you to get caught in a downdraft. Better, in my opinion, to get stopped out, and if we have a good downdraft, which I would love to see cleaning out some of these lofty, stretched links in this wonderful chain, it gives us an opportunity to buy in lower.

There’s nothing wrong with putting profits in your pocket. Yes, you’ve got to pay tax on some of that short-term stuff, and of course you’ve got to pay tax on the long-term stuff. And most of you probably have a lot of good long-term gains. Not a problem paying taxes, especially if you get to pocket a ton of money and then you get to buy back into your favorite stocks maybe 5%, 10%, 15% lower.

I’m not saying we’re going to go there, but at some point, we’re going to see a correction.

Could take a while. That’s why you stay in the game. You keep dancing till the music stops.

There are your takeaways for today. Cheers, everybody.