Using Robert Shiller's Cyclically Adjusted Price/Earnings (CAPE) formula, the CAPE ratio comes to 25.4. As a result, it the stock market "corrects" to the point where Robert Shiller's CAPE ratio declines to where it was in the late 1980s, (approximately 12.5) the S&P 500 would have to drop 50% from its current level to 919. Even if a less-extreme correction were to occur, wherein the trailing 12-month price-to-earnings multiple would fall from the current P/E multiple of 17.3 back to the 12.8 observed in 2012, the S&P 500 index would sink 35% to 1,195.
In considering what could trigger such an event, it is important to keep in mind that the current level of stock prices is apparently being largely driven by investor sentiment, rather than by fundamentals.
For example, those high-momentum stocks, which draw an enormous amount of trading volume, have absurd price/earnings ratios and suffer/enjoy wild swings based solely on "mo-mo." In the event of a meaningful decline, those stocks would likely lead the way down since their investors would have the most to lose. Beyond that, there are quite a number of S&P 500 stocks with trailing 12-month price/earnings ratios in excess of 20. What will happen to the S&P 500 if/when those shareholders start running for the exits?
In considering what could trigger such an event, it is important to keep in mind that the current level of stock prices is apparently being largely driven by investor sentiment, rather than by fundamentals.
For example, those high-momentum stocks, which draw an enormous amount of trading volume, have absurd price/earnings ratios and suffer/enjoy wild swings based solely on "mo-mo." In the event of a meaningful decline, those stocks would likely lead the way down since their investors would have the most to lose. Beyond that, there are quite a number of S&P 500 stocks with trailing 12-month price/earnings ratios in excess of 20. What will happen to the S&P 500 if/when those shareholders start running for the exits?