One gauge of stock-market valuation has reached its highest point since the dot-com bubble - and exceeds levels seen before the 1929 crash

The New York Stock Exchange (NYSE) is seen in the financial district of lower Manhattan during the outbreak of the coronavirus disease (COVID-19) in New York City, U.S., April 26, 2020.
Jeenah Moon/Reuters

The S&P 500's CAPE ratio - which measures inflation-adjusted earnings over the past 10 years - has reached its highest level since the 2000s tech bubble and has recently surpassed the peaks seen just before the 1929 market crash.
The valuation gauge also doubled its historical mean of 16.72 on Monday.
The metric suggests the stock market may be grossly overpriced, but it's not perfect, Deutsche Bank strategist Jim Reid said. The CAPE ratio has been above its historical average since 1991 barring a 10-month period during the financial crisis.
Tech giants are probably boosting the ratio in a way "they probably never have before," Reid said.
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One measure of stock-market pricing suggests vaccine-fueled bullishness might have stretched valuations too thin.

The S&P 500's cyclically adjusted price-to-earnings, or CAPE, ratio currently sits at its highest point since the 2000s tech bubble, Deutsche Bank strategist Jim Reid said in a note. It also exceeds levels seen just before the 1929 market crash and the more recent high seen in January 2018.

The gauge measures average inflation-adjusted earnings over the past 10 years, as opposed to current profits. The ratio was popularized by famed economist Robert Shiller and is also known as the Shiller price-to-earnings ratio.

The ratio hit 33.71 on Monday, double the historical mean of 16.72. The CAPE ratio hit its record high of 44.19 in December 1999.

The lofty readings come as stocks dip from record highs achieved on Friday. US equities fell on Monday as soaring COVID-19 case counts prompted new economic restrictions in California. Though vaccine hopes continue to inspire risk-taking, public health experts have warned that the pandemic will likely get worse before a shot is widely distributed

The CAPE ratio is typically used to gauge whether the market is overpriced or undervalued, but it should be taken with a grain of salt, Reid said. For one, the gauge has sat above its long-term average since early 1991 barring a 10-month period during the financial crisis.

"If this ratio does mean revert (which it probably does) it can take a lifetime of investing and structural shifts to do so in both directions," the strategist said.

A small set of mega-cap tech stocks played a unique role in driving the indicator higher, Reid added. The market's biggest stocks are influencing the CAPE in a way "they probably never have before," and will likely determine whether the gauge swings higher still or retraces its uptick.

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