Wall Street’s analysts and market strategists are at pains to explain what Burry and Jones can’t, namely, why U.S. big caps keep jumping to fresh, all-time records. The economic fundamentals overall look mediocre at best. The current scenario headlines inflation that’s proving both high and extremely sticky, as underlined once again in the April CPI report on May 12 that showed consumer prices advancing a hot 3.7% in the prior 12 months. GDP growth’s ho-hum, the 10-year Treasury yield’s stuck in the elevated mid-4% range, and ultra-tall energy prices keep digging into consumers’ wallets, hiked by a war that keeps dragging on. Not to mention vanishing hopes that the Fed will juice the market via big rate cuts. 

In their notes to investors and TV appearances, the bulls increasingly cite the same justification: A surge in corporate earnings that’s supposed to prove unstoppable due to the super-power of AI. “Absolutely non-stop AI,” Burry fretted after listening to prognosticators in the media endlessly tout the breakthrough as a miraculous cure-all for the sundry negatives. “No one is talking about anything else all day.”

But investors should beware: Torrid earnings-per-share—and they’ve never been this overcooked before—aren’t durable. They come and then inevitably, they go. Profits are subject to huge swings that when they’re unsustainably high, push regular price-to-earnings ratios artificially low, wrongly suggesting stocks are cheap, and when EPS temporarily craters, render PEs abnormally steep, incorrectly portraying the S&P as unusually expensive. Corporate profits now sit at historic peaks as a share of national income, strongly suggesting that in the years ahead, they’ll “revert to the mean” by falling towards the lower, long-term average. That’s always happened when EPS numbers exploded beyond normal bounds in the past. Hence, by swelling the denominator, today’s inflated earnings mask how expensive stocks really are by making PEs appear on the borderline of reasonable.

A highly-respected yardstick erases that illusion. It deploys an averaging system that smooths those temporary spikes and drops in earnings to get a consistent gauge on how richly or lowly-priced stocks really are.

This preferred measure is the renowned cyclically-adjusted price earnings ratio or CAPE developed by Yale professor emeritus and Nobel Prize laureate Robert Shiller. The CAPE’s one of the best forecasters of future returns. When it’s way above the historic norms, you’re likely to get weak returns 5 or 10 years hence; when the measure’s far below average, your chances of prospering in the years ahead are greatly enhanced.

Specifically, the CAPE marshals a 10-year average of inflation-adjusted earnings. That methodology removes the zig-zagging, and calculates a far more accurate PE. 

As of May 11, the CAPE had just moved past a dangerous milestone, reaching 40.3. The CAPE—which Shiller posts every month—has only exceeded 40 in its entire 145-year history 21 times, all concentrated in a single continuous period running from January of 1999 to September of 2000. That interlude marked the height of the Dot Com frenzy. Even in the run-up to the Great Depression, the CAPE barely broke 30.

So what kind of returns can you expect buying into the 500 index, or even holding a diversified portfolio of large-valuation U.S. stocks going forward? The record since the end of those 40-plus, Dot Com CAPEs provides a guide: It took twelve years and five months, until February of 2013, for the S&P to regain the super-heady levels of September 2000.

Investors did collect dividends while their cap gains amounted to zero, but all in all, the gains lagged well behind inflation. Investors did much worse than if they’d parked their cash in Treasuries. 

The incredible run we’re witnessing may have a simple explanation: Sometimes, markets just go crazy. That argument could be wrong. But it makes just as much sense as the Wall Street hype that paints a gray backdrop as a scene of brilliant sunshine.