The writer is a managing director at Panmure Liberum
US stock market valuations are once again approaching the highs of the 2000 dotcom bubble. This already points to the increased risk of significant losses in the future, but what makes things worse is that these extreme valuations are being achieved at a time when company earnings are also well above normal levels. If valuations normalise and earnings decline at the same time, the losses for investors could compound rapidly.
Professor Robert Shiller from Yale University popularised the cyclically adjusted price-to-earnings ratio (CAPE) as a measure for the long-term prospects of the S&P 500. This ratio is back in the spotlight after it surpassed 40 times in May, the first and only time this has happened since the peak of the tech bubble of the late 1990s.