A signal unseen for 26 years has appeared in the US stock market — is a dot-com bubble repeat coming?

US stock market valuations have surged to their highest level in 26 years, raising fresh alarm about a repeat of the dot-com bubble collapse. Analysts say, however, that the current overvaluation does not necessarily point to an imminent crash of the same magnitude.

According to US investment outlet Motley Fool, the cyclically adjusted price-to-earnings ratio, or CAPE, for the S&P 500 recently reached 42.2 — the highest reading since November 1999, when it hit 44.2 at the height of the dot-com bubble. The report was published Sunday (local time).

The CAPE ratio measures a company’s share price against its average inflation-adjusted earnings over the past 10 years. Because it incorporates a longer earnings window than a standard price-to-earnings ratio, it is widely used to assess whether markets are overvalued over the long term.

The current reading is historically elevated: since 1990, the CAPE ratio has averaged just above 27.

Analysts caution, however, that drawing a direct parallel between today’s market and the 2000 dot-com crash oversimplifies the picture.

During the dot-com bubble, enormous capital flooded into internet companies that generated little to no sales or profits, sending share prices soaring. The S&P 500 climbed to 1,527 in March 2000 before losing roughly 50 percent of its value over the following two and a half years, wiping out countless companies and inflicting heavy losses on investors.

By contrast, the large technology companies driving today’s AI boom are generating real sales and profits, giving them far stronger fundamentals than their dot-com-era counterparts.

Motley Fool noted that the current S&P 500 is concentrated in the “Magnificent Seven” stocks, for which investors are willing to pay a premium. “There is debate about whether the current AI craze is a bubble,” the outlet said, “but these companies are far from the speculative, unproven, and unprofitable businesses of the dot-com era.”

The fact that the CAPE ratio has climbed to levels comparable to that period does add pressure to the market. Analysts said, however, that a past correlation between high valuations and sharp market declines is not sufficient grounds to conclude the same outcome will follow today.

Motley Fool said staying invested for the long term matters more than trying to predict short-term market direction. It also recommended dollar-cost averaging — committing a fixed amount to the market at regular intervals regardless of conditions — as a preferred investment approach.

The outlet said attempting to time the market by assuming history will repeat itself exactly — selling shares in anticipation of a downturn — could in fact prove counterproductive.

bbo@heraldcorp.com