Nobel Prize-winning economist Robert Shiller made a name for himself when he predicted the dotcom bubble using his now-famous CAPE ratio. CAPE is short for cyclically-adjusted price-earnings ratio. It’s calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long-term average of around 16, the stock market is considered expensive. Shiller has argued that the CAPE is remarkably good at predicting returns over the period of several years.
As the stock market has drifted to all-time highs, prices have outpaced earnings growth and the CAPE his risen to a notable 24 times. Some folks warn that that this means the odds of a crash have risen significantly. Check it out: