By one respected valuation measure, the CAPE ratio, the stock market is more expensive than it has been at any point except the very peak of the dot-com bubble in 2000. But there is a twist that changes the whole story. Strip out a dozen or so AI names, and the rest of the market looks close to normal. Here is what that means for your money.

Every so often a number stops me in my tracks, and this week it was the CAPE ratio. Ron and I spent a good chunk of the episode on it, because it is flashing a warning that most people are not talking about, and because the fine print behind it turns out to matter just as much as the scary headline. Let me walk you through both, the way I would walk a client through it across the kitchen table.

How expensive is the market, really?

The CAPE ratio, sometimes called the Shiller PE, is just a way of measuring how richly the market is priced, except instead of using one year of earnings it averages them over ten years to smooth out the bumps. That gives you a cleaner, less jumpy read. Right now it is sitting at a level it has topped only one time in history, and that one time was the year 2000, right before the dot-com bubble came apart. Read that again, because it is worth sitting with. On this measure, we are in rare and slightly uncomfortable air, and that is the kind of number that should make any sensible investor pay attention.

The twist: the froth is narrow, not everywhere

Here is where the nuance comes in, and where most of the frightening headlines quietly stop short. When you look under the hood, that rich valuation is not spread evenly across the whole market. It is concentrated in a fairly small group of AI names, maybe ten to fifteen stocks doing an enormous amount of the heavy lifting.

Peel those off, and the rest of the S&P 500 is trading at a CAPE closer to 20 or 21, right around its long-run average. In plain terms, the great majority of the market is priced pretty normally. The froth is real, but it is narrow, and that is a very different animal than 2000, when the excess was just about everywhere you looked.

That distinction matters more than it sounds, because of what it means for what you own. If you hold a plain S&P 500 index fund, you probably think of yourself as diversified, and in a sense you are. But you are also quietly carrying a very large bet on that same handful of AI names, because they now make up such a big slice of the index. That is wonderful on the way up. It is a lot less wonderful if that group hits a rough patch. As I tell my clients, the fix is not to sell everything in a panic. It is to actually know what you own, and to make sure you have real exposure beyond the crowded trade.

Does expensive mean a crash is coming?

Not necessarily, and this is the part that keeps me honest. The S&P is up about 10 percent on the year, and we could be looking at a fourth straight year of double-digit gains, which is historically unusual and genuinely impressive. A stretched valuation does not mean a crash is due next week. Expensive markets have a long history of staying expensive far longer than anyone expects. What a high valuation really does is thin out the cushion, so that when something does go wrong, it matters more than it would in a cheaper market.

What the quiet data is saying

Underneath the valuation story, a few economic reports shifted the Fed picture fast. Between the recent jobs, CPI, and PPI numbers, the odds of a Fed rate hike went from around 57 percent just before last Friday's jobs report down to under 2 percent within days. That is an enormous swing in a short window. The Fed is clearly on hold, and the whole conversation has moved from "will they hike" to "when do they cut."

And then there is a risk Ron and I keep coming back to, because it has not gone away: the yen carry trade. For years, traders have borrowed money in Japan at almost nothing, since the country has kept rates near zero for over a decade, and poured it into higher-returning assets around the world, including those same AI stocks. The yen is sitting at a 40-year low, and everyone is watching the Bank of Japan. If Japan finally moves, that trade can unwind in a hurry, and because it is leveraged and global, markets would feel it almost immediately. That is not a prediction. It is just a risk worth having on your radar.

Click Here to learn more about the Yen Carry Trade.

So what do you actually do?

Nothing dramatic, which is usually the right answer. Start by knowing your concentration, because owning the index today means owning a big AI position whether you chose it or not. Make sure your diversification is real and reaches beyond the crowded names. Expect a bumpier ride, given stretched valuations up top and the carry trade lurking in the background. And do not confuse expensive with doomed. The goal was never to call the exact top. It is to be positioned so that a pullback becomes an opportunity instead of a catastrophe.

Frequently asked questions

What is the CAPE ratio? It is a valuation measure, also called the Shiller PE, that averages company earnings over ten years to gauge how expensive the market is. A high reading means stocks are richly priced relative to history.

Is the market really as expensive as the dot-com bubble? By the CAPE ratio, the overall market is near levels last seen in 2000. But that richness is concentrated in a small group of AI stocks. Take them out, and the rest of the market sits close to its long-run average.

Does a high CAPE ratio mean a crash is coming? No. It signals a thinner margin for error, not a specific event on the calendar. Expensive markets can stay expensive for a long time.

Why does the yen carry trade matter? Traders borrow cheaply in Japan and invest the money elsewhere, including in AI stocks. If the Bank of Japan raises rates, that trade can unwind quickly and put pressure on global markets.

The bottom line

The market is expensive, but the real story is more interesting than the scary headline. The froth is concentrated in a handful of AI names, while the rest of the market looks fairly ordinary. So the actual job in front of you is not predicting a crash. It is understanding your own concentration and making sure you are diversified beyond the crowded trade. Stay invested, stay diversified, and keep your head. If you want this kind of straight, plain-spoken read on the market every week, subscribe to The Cents of Things.

Source: per The Cents of Things market review recorded August 13, 2026, the CAPE (Shiller PE) ratio was at a level exceeded only once before, in the year 2000, while the market excluding the largest AI names sat near its long-run average, around 20 to 21.