The S&P 500's Shiller CAPE ratio has climbed above 40 for only the third time in 155 years of data, a level last seen at the peak of the dot-com bubble and one that historically preceded steep, prolonged declines.
The ratio and its record
The cyclically adjusted price-to-earnings measure, developed by economist Robert Shiller as a valuation gauge rather than a timing tool, has now breached 40 twice before. The first occasion came in late 1999 and early 2000; the S&P 500 subsequently lost nearly half its value and required seven years to reclaim its highs. In 1929 the ratio topped 30 for the first time, ahead of the crash that opened the Great Depression. More recently, a move above 36 in late 2021 was followed by a bear market that persisted through most of 2022.
The defensive trio
Analysts pointing to the signal highlight three names they argue can withstand a downdraft. Johnson and Johnson, a Dividend King with a payout-raising streak dating to 1962, cites stable healthcare demand and a pipeline of 97 programs. Procter and Gamble, another Dividend King, benefited from the relative resilience of consumer staples after the dot-com collapse and sells everyday items such as detergent and diapers that households keep buying when budgets tighten. Enterprise Products Partners, a midstream operator with more than 50,000 miles of pipeline, offers a 6.2 percent distribution yield and contracts with inflation escalation clauses that make its revenue behave more like a toll road than a commodity play.
The counter case
A high CAPE reading does not guarantee an imminent decline. The market can continue climbing despite historically rich valuations, and the three recommended stocks are positioned to generate returns in either scenario.
What to watch
The next test is whether earnings broaden enough to bring the ratio down without a price correction, or whether the pattern of the past two centuries reasserts itself.