Market Valuation Analysis: Shiller CAPE at Dot-Com Levels Despite Current Earnings Support

This analysis examines the critical market valuation question raised in a November 14, 2025 Reddit post regarding the contradiction between current earnings-supported valuations and the Shiller CAPE ratio approaching dot-com bubble levels [0].

The core issue centers on two conflicting valuation metrics that paint very different pictures of market health:

: The S&P 500 currently trades at approximately 30.42 [2], which while elevated compared to historical averages, appears reasonable given current earnings levels. This metric supports the observation that current valuations don’t immediately signal bubble territory.

: The more concerning metric is the Shiller CAPE ratio, which stands at 40.01 as of November 2025 [1]. This represents the second-highest level in history, trailing only the peak of 44.2 observed just before the dot-com bubble burst in 1999-2000 [4]. The CAPE ratio’s long-term historical average is around 16.03, highlighting the extreme overvaluation currently present.

The divergence occurs because trailing P/E reflects current earnings boosted by AI-related companies, while Shiller CAPE uses 10-year averaged inflation-adjusted earnings, smoothing out recent AI-driven earnings spikes and providing a more normalized valuation perspective.

Recent market data reveals a concerning pattern of divergence:

• S&P 500: Essentially flat over the past 30 days (+0.00%) [0]
• NASDAQ Composite: Slightly positive (+0.03%) [0]
• Dow Jones: Modest gains (+0.79%) [0]
• Russell 2000: Notable decline (-4.05%) [0]

This suggests large-cap tech stocks (which dominate the S&P 500 and NASDAQ) are maintaining valuations while smaller companies face pressure, indicating market concentration risk.

The concerns about AI-driven earnings sustainability are well-founded and supported by multiple data points:

: 54% of fund managers surveyed by Bank of America in October 2025 said AI equities are “in a bubble” or overvalued, while 60% labeled global equities overpriced [5][6]. This represents significant professional investor concern.

: AI-related capital expenditures surpassed U.S. consumer spending as the primary driver of economic growth in H1 2025, accounting for 1.1% of GDP growth [7]. However, a MIT study found that 95% of 300 surveyed AI developments have yet to turn a profit despite companies spending up to $40 billion [6].

: AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth since ChatGPT launched in November 2022 [7]. This creates systemic risk if AI growth disappoints.

The Shiller CAPE ratio has historically been a reliable predictor of long-term returns, with high levels typically followed by below-average returns over the subsequent 10-20 years [4]. The current level of 40.01 suggests potential for significant mean reversion, similar to what occurred after the dot-com bubble peak.

1. Valuation Extremes
   : The Shiller CAPE ratio at 40.01 represents the second-highest level in history, only surpassed by the dot-com bubble peak [1][4]

2. Profitability Gap
   : The disconnect between massive AI investment spending and actual profitability (95% of AI developments unprofitable) raises serious concerns about earnings sustainability [6]

3. Concentration Risk
   : With AI stocks driving 75% of S&P 500 returns, any slowdown in AI adoption could trigger broad market declines [7]

4. Institutional Positioning
   : The broad agreement among fund managers suggests professional investors may be positioning for a correction [5][6]

1. AI Earnings Reports
   : Watch for signs that AI companies are achieving sustainable profitability rather than just revenue growth
2. CAPE Ratio Trends
   : Monitor whether the ratio continues rising toward the 44.2 dot-com peak or begins declining
3. Institutional Flow Data
   : Track whether professional investors continue reducing exposure to AI stocks
4. Economic Indicators
   : Watch for signs that AI investment is translating to broader economic productivity gains

The analysis reveals a fundamental market dislocation where short-term earnings metrics appear reasonable while long-term valuation indicators signal extreme risk. The AI investment boom has created earnings growth that may not be sustainable, with massive capital spending yet to translate into profitability for the vast majority of AI developments [6]. The market’s heavy reliance on AI sector performance (75% of S&P 500 returns) creates significant systemic risk if the current investment-to-profitability gap persists [7].

The Shiller CAPE ratio’s warning should not be dismissed, as its 10-year smoothing mechanism specifically designed to filter out temporary earnings spikes and provide a more normalized view of valuations [1][4]. Current levels suggest the market is pricing in continued AI-driven earnings growth that historical precedent and current profitability data do not support [0].