Transcription
There is a stock market indicator that historically has had a rather worrying habit. It becomes very high just before major crises. So it was at its peak in the late 20s before the Great Depression of 1929. It was at its peak in 2000 before the dot-com bubble burst, and it was quite high in 2007 before the great financial crisis of 2008. And guess what? It is again at an extremely high level today. So if you thought everything was going to be fine, that this time we were safe, well, this ratio tends to disagree. This indicator is called the Shiller PE ratio. You will sometimes see the initials CAPE, and what it potentially tells us is that we are sitting on something very fragile. But be careful, this is where the story becomes interesting because an indicator, even if it has worked well in the past, it is worth asking if it is still relevant because the market of 2026, the stock market of 2026, ultimately has little in common with that of 1929, nor even sometimes with that of 2000. So, does this Shiller ratio really herald a collapse, or are we using a tool from the past for a market that has ultimately evolved enormously and no longer represents that of 2000 or that of 1929 at all? We will start, of course, by defining this ratio, this Shiller PE, also called CAPE. It is ultimately an improved version of the PE ratio, the price-to-earnings ratio. The central idea, you know it, is to compare the valuation of a company or all companies, so the stock market as a whole. So, to compare the valuation of a company to the earnings it generates. So a PE ratio of 10 simply means that you are paying the equivalent of 10 years of earnings to buy the company today. Of course, you don't really get your investment back immediately, but it's a way to intuitively measure how optimistic or not the market is about the future. And the higher the PE ratio, the more the market is considered to be paying dearly because it anticipates strong growth. But the problem with the classic PE ratio is that it is very misleading because the earnings of a company or an entire market fluctuate enormously depending on the economic cycle. In times of euphoria, profits explode and the PE ratio appears reasonable. And in times of crisis, it's exactly the opposite. Profits will collapse, so the PE ratio suddenly becomes enormous while prices have already fallen and it's probably a good idea to enter the market. And this is where Shiller comes in with his idea. So it's Robert Shiller, an economist at Yale, a Nobel laureate, who said, "Well, instead of looking at the earnings of a single year, which can be exceptional or catastrophic, why don't we smooth all that out? Why not take an inflation-adjusted 10-year average to get a much more stable picture of the company's true earning capacity?" And that's exactly what CAPE is, the cycle-adjusted PE ratio. We don't look at yesterday's profits, we don't look at estimated profits for next year, we look at the average profits over an entire decade. And that's why this indicator is often presented as a long-term valuation thermometer. It is obviously not a marketing tool, it's not a crystal ball, but it is a temperature indicator. Is the market hesitant? Is it rather normal? Or is it in full fever, in full euphoria? I'm pausing the video for 2 seconds to tell you about Saxo Bank. So, it's the partner that helps finance this channel, it's true, but it's above all the broker I use for my investments. When I chose my broker, I wanted above all not to be limited. With Saxo, we have access to over 23,000 stocks, 7,000 ETFs, and over 5,000 bonds on more than 50 stock exchanges worldwide. Another important point for me, transparent and competitive fees, whether on European, American, or Asian markets. And since I'm talking about fees, if you open or transfer a securities account, a PEA, or a corporate securities account with Saxo, you will receive €500 in brokerage fees free of charge for the first three months by following the link in the description. Alright, back to today's video. Historically, this long-term price-to-earnings ratio, or rather this 10-year average price-to-earnings ratio, has a rather good reputation because it has good predictive power. The long-term average ratio in the United States is around 17. Today, we are rather around 40, which is twice as high as normal. And of course, when we see that, we immediately think of those periods when the market became very expensive. I've already told you about the late 20s, before the 1930s crash, it had exceeded the level of 30. The dot-com bubble in 1999-2000, this ratio had reached its peak around 44, and then the pre-financial crisis period before 2008, so we were at rather high levels. So yes, in 2026, statistically, we are at extreme levels, levels we see very rarely. And this ratio has another important characteristic. When it is high, future returns, so the returns of the next 10 years, 15 years, tend to be lower. Not necessarily negative, but lower. Normally, buying expensively will reduce our room for maneuver, it will obviously reduce our future profit potential. So, so far so good, we understand, but this is where it gets interesting because there is an enormous temptation when you have a ratio like this that has good predictive power and reaches somewhat crazy levels, an enormous temptation to make two totally opposite mistakes. The first mistake is to sell everything, to wait in a cellar with cans of food and cash in hand, and to say, "I'll buy it all back when it's at its lowest." The second mistake is to say that the indicator is useless because it bothers us. It's like throwing away the thermometer because you don't like the fever. That's not really a good idea. That's not what I'm going to do today. What I would like to do today is to explore a much more subtle question. Does the Shiller PE still correctly measure the reality of the current market? Because I think you'll agree with me, the world has changed. It hasn't changed slowly, it has changed brutally. So this famous Shiller PE based on a 10-year average implicitly means one thing: that 10 years is a relevant period. But when I think about it, I say to myself, but 10 years today, today in the 2020s, the future 2030s, is not like the 1970s. In 1970, 10 years was a decade of industrial continuity. The world was evolving, but it wasn't transforming. Whereas today, we are changing worlds. When I think about what the world was like in 2016, in 2016 TikTok barely existed. ChatGPT, for that matter, didn't exist at all. Artificial intelligence was a lab topic. When we talked about GPUs, well, it was to talk to gamers about graphics cards and so on. Nvidia was a good company, but it wasn't the biggest company in the world like today. So, first idea, the Shiller ratio looks back 10 years, but 10 years ago today, at least, it's another world. And it's worth taking examples, I think, because we don't realize how much the world has changed between 2016 and 2025-26. In 2016, I was talking about Nvidia, a very good company, but it mainly made graphics cards for gaming. A bit of data centers, but nothing comparable to today. Nvidia's revenue in 2016 was $5 billion. Nvidia in 2025 is $130 billion. Nvidia, as you know, has become the essential supplier of all global computing power. A kind of bottleneck because when everyone wants AI, well, everyone wants Nvidia chips. So, we are not at all on linear growth here. It's really a change of role in the economy for a company like Nvidia. And a ratio like the Shiller PE captures this extremely poorly because implicitly, it compares Nvidia's gaming version to Nvidia's global infrastructure version, when it's no longer the same company at all. Netflix is the same. In 2016, Netflix had about 90 million subscribers. Today, Netflix has over 260 million subscribers. So we've gone from a nice streaming platform, yes, Netflix in 2016, to a company that influences global audiovisual production. Again, this is not linear growth at all, and I can go on like this. Apple in 2016 was mainly about the iPhone. Apple today is a service annuity, a subscription empire, and so on, with a business model that is more recurring, more predictable, and more profitable. So, naturally, with valuation multiples that can be higher or at least justifiable as higher. And it's not that the market is irrational, it's because the nature of cash flow has changed. And I could take Amazon, I could take Google. They are obviously not the same companies as 10 years ago. ASML is truly a fascinating example. 10 years ago, few people knew this Dutch company, whereas today, it is probably one of the most strategic companies in the world. Because some of you know, without these EUV lithography machines, there are no advanced semiconductors. There are no Nvidia chips as we know them today, and there is no modern AI as we know it today. How can we compare a company like ASML in 2026 to a classic industrial company from the 1980s? But you don't need to stay in tech to understand that the world is moving a lot. LVMH in 2016 had 4,300 stores. Today, we are at over 6,300 stores. McDonald's has 36,000 restaurants. In 2016, it was almost 44,000 restaurants today. So, why am I insisting so much on the difference between the world of 2016 and the world of 2025-2026? It's because the Shiller ratio implies that comparing today's market to the average earnings of the last 10 years is a relevant comparison. But the listed companies have not remained static over these 10 years. They have modernized, they have globalized, they have opened factories, stores, hired employees, filed patents, created new products. So to say, "I'm taking the average earnings over 10 years," is to act as if the company had remained the same throughout that period. It's like, to take my McDonald's example again, saying, "Well, McDonald's, which went from 36,000 restaurants to almost 44,000 today, we'll take the smoothed earnings over 10 years, even though there were almost 8,000 fewer restaurants 10 years ago, to judge its current valuation, its valuation now." You have to take today's number of restaurants. It's a bit like evaluating today's valuation with a McDonald's that had thousands of fewer restaurants. To me, that makes no sense. And just to put things in perspective, still over this 10-year period, in 2016, Airbnb and Uber were not even listed on the stock exchange. So the problem with this famous ratio is not that it's wrong, but that the world is changing too fast today for a 10-year average to still be a good mirror. So, you might tell me, let's take an average over 3, 4, or 5 years, but the problem is that cycles are rather long. So Shiller's idea, which was good at the base, was to take a sufficiently long period to smooth out the cycle, whether we are currently in a period of euphoria or depression. So, as often, it's always a bit more complicated in economics or finance, there are always other things to consider, especially interest rates, because a Shiller ratio of 40 is much easier to digest when rates are low, between 2010 and 2020, than when the risk-free investment yields between 4 and 5%. At a time when a government bond supposedly yielded 1%, well, stocks naturally become the only option. This was called TINA, there is no alternative. If money market doesn't yield anything, cash doesn't yield anything. If risk-free bonds don't yield anything, then you are willing to pay much more to seek returns, especially from stocks. But today, we have changed worlds. We are in an environment where investing money risk-free can yield 4%, where bonds are becoming a real alternative again. So, we would expect a lower Shiller ratio. So this Shiller ratio of 40 in an environment where rates have risen, we see it, it's rather worrying. We've seen it, this ratio has flaws, especially when the world changes very quickly, it loses much of its meaning. But as I said, throwing away the thermometer because you don't like what it tells you is never a good idea. Because the Shiller ratio, at its core, reminds us of something very simple. The economic world is cyclical. Markets are cyclical, profits are cyclical. And we have forgotten this because we are living through one of the longest bull markets in history. But this is something we absolutely must keep in mind. Especially since, paradoxically, today's largest companies are in sectors that have historically always been cyclical. Advertising, for example, Alphabet, Meta, well, when the economy slows down, advertising budgets also slow down, and they are often the first to be cut. Semiconductors, probably one of the most cyclical sectors there is. We go from shortages to overcapacity in a few quarters. Premium goods, luxury goods, Apple, etc., these are products that are exceptional with very good pricing power, but they are generally cyclical products. And I know that when I say this, many people immediately think, "No, but precisely these companies are different, they are indestructible, they are structurally non-cyclical." Perhaps they have become less cyclical, or perhaps the cycle is just much longer. But that's precisely why I always keep the idea of this Shiller ratio in the back of my mind, especially when it reaches levels of 40. Not to say a crash is coming tomorrow morning, you know that's not my style at all, not to live in fear, but rather as a reminder, a reminder that crises exist, that excesses exist, and that stock market returns are never linear. And when we come out of a decade where stock markets have been very generous, where they have even been exceptional, we must psychologically prepare for a subsequent decade that will perhaps be a little less spectacular, perhaps with more modest returns, perhaps also with more volatility, perhaps with more difficult periods. And that, for me, is what this Shiller ratio is: a reminder of humility, a reminder that the world changes quickly but that the cycle itself has never disappeared. And in my opinion, we will rediscover many sectors that are perhaps more cyclical than we think. What do you think of a Shiller ratio like this reaching extreme, aberrant levels around 40? I remind you of the historical peak around 44 during the dot-com bubble. We are above the 2008 financial crisis, we are above the pre-crisis levels of the 1930s. What do you think? Is it worrying for you? Are we in a new world? You've understood, I'm a bit between the two. I don't think it's the best thermometer to know where we stand today, but it's still a thermometer that we should use and keep in mind. What I really keep is this cyclical aspect of markets. We are in a period of over-investment, particularly at the AI level, but consumption is still there, except in China. So, I have many questions about this, but what interests me is your point of view. Put it in the comments. Where are we in a cycle? Have cycles disappeared? Put all that in the comments. Do you use this type of ratio that tells you that, beware, the stock market is not the time? Thank you all for your follow-up, whether it's often podcasts or videos. Don't forget to like, to subscribe if you haven't already, and I'll see you soon for other videos. Co?