Red alert: This chart says Wall Street is ready to crash

Usually when numbers shoot higher on Wall Street, it is a reason for celebration.

That is not how Jonas Goltermann, the chief markets economist at Capital Economics, feels when he looks at one of the most feared charts on the sharemarket: the Shiller price-to-earnings (PE) ratio.

“That’s obviously a bit worrying,” he says after seeing the metric on track to end the month at its highest level since August 2000.

The Shiller PE ratio, a closely watched fear gauge on Wall Street, may sound esoteric, but it has become one of the most important numbers in the world – and one you should care about.

For all intents and purposes, it is the canary in the coal mine for global financial crashes.

“It tells you that it probably is a bubble, but you don’t know when it’s going to end,” says Goltermann.

The last time it was this high – August 2000 – was in the throes of the dotcom bubble collapse, when it was hitting record highs when applied to the S&P 500 – the benchmark stock index on Wall Street.

The closely watched metric, used by traders to measure whether stocks are fairly valued, finished above 40 points for nearly two years between 1999 and 2000 – despite never previously hitting the mark in the 119-year history of the S&P index.

When the dotcom bubble collapsed, the Shiller PE ratio was highlighted as evidence that the market should have seen a crash coming – but did nothing about it.

Worryingly, the index has gone above the 40-point mark for the first time since the dotcom bust. It reached this level in May, June, July and August of this year as markets are gripped by the mania surrounding AI.

“We’re probably closer to the end than the beginning – the final innings,” says Goltermann.

“The moment we’re in right now, it feels like it is more driven by narrative and momentum. The price goes up because the price is going up.”

The Shiller price-to-earnings (PE) ratio, developed by Robert Shiller, the Nobel Prize-winning American economist, is designed to measure whether stocks are “overvalued” – which is to say whether share prices are supported by the underlying earnings of a company.

When it goes high, it suggests prices have become disconnected from the reality of company earnings – with froth and euphoria leading the charge.