Major U.S. indexes have slipped 1% to 2% over the past month, and a century-old valuation gauge is flashing a level last seen four months before the dot-com bubble burst. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite each posted declines in that range as of mid-September, while the Shiller CAPE ratio climbed just above 40, a threshold crossed only twice before, in 1929 and late 1999.
The gauge and its track record
The cyclically adjusted price-earnings ratio, which smooths earnings over ten years, hit a record 44 in December 1999. The Nasdaq peaked four months later. The measure does not predict timing, but its two previous excursions above 40 coincided with the onset of the Great Depression and the dot-com collapse. Today’s reading above 40 does not guarantee a crash, but it places current valuations in rare historical company.
Why the market has softened
The pullback coincides with a cluster of pressures: fresh doubts about artificial-intelligence monetization, oil prices at new highs, bond yields at levels the source calls dangerous thresholds, and a widely expected Federal Reserve rate increase this week. Indexes had absorbed earlier volatility without breaking trend; the last month suggests that resilience may be fraying.
Buffett’s 1999 framework
In a Fortune article published during the dot-com run-up, Buffett argued that investors were confusing societal impact with investment merit. He cited the airline industry: air travel had transformed the world, yet 129 carriers had gone bankrupt in the preceding two decades. The subsequent crash validated the point, hundreds of internet stocks evaporated. His prescription was to ignore industry growth narratives and focus instead on whether a specific business possesses a durable competitive advantage.
What to watch next
The CAPE ratio above 40 and the index declines of the past month are facts; the Fed decision and AI earnings trajectory are the variables. If the central bank hikes as expected and mega-cap tech guidance disappoints, the valuation argument gains weight. If earnings broaden beyond the narrow leadership of the last two years, the ratio could normalize without a crash. The market is pricing the first scenario more than the second.