Michael Burry has built a reputation for asking the question Wall Street doesn’t want to hear: What if everyone is wrong?
The investor became famous for betting against the housing market before the 2008 financial crisis. Now he’s warning that today’s artificial intelligence boom bears uncomfortable similarities to previous market bubbles.
Burry isn’t merely warning that some AI stocks are overpriced. In May, the investor who famously bet against the housing bubble called today’s AI boom “just an asset bubble, plain and simple,” comparing it with the dot-com era.
Burry could be early. He could even be wrong. But there’s another reason investors should pay attention: A widely followed valuation indicator is now just shy of breaking a record set during the very bubble Burry is comparing today’s market with.
The Number Behind the Warning
The indicator is the cyclically adjusted price-to-earnings ratio — better known as the CAPE ratio — that was popularized by Nobel Prize-winning economist Robert Shiller, though its roots trace back to value-investing pioneer Benjamin Graham.
Unlike the conventional P/E ratio, CAPE compares stock prices with average inflation-adjusted earnings over the previous decade. By smoothing out the effects of recessions and unusually strong or weak profit years, it offers a broader view of how expensive the stock market is relative to corporate earnings. And right now, the answer is: very expensive.
The CAPE ratio today stands at 42.56, compared with an all-time high of 44.19 reached in December 1999, near the peak of the dot-com bubble. Its long-term average is just 17.40. It is just 3.7% below establishing a new CAPE record.
That would be more than a psychological milestone. It would mean investors were paying a higher price relative to long-term earnings than at any other point in the 156-year historical CAPE data.
History Isn’t a Timing Tool
That’s important because a high CAPE ratio doesn’t tell investors when to sell.
The market continued climbing after CAPE reached its record in 1999. Investors who sold too early missed another leg higher before the dot-com bubble finally burst. But CAPE can tell investors something arguably more useful: how much optimism is already embedded in stock prices.
When valuations become extreme, companies have to deliver extraordinary earnings growth to justify those prices. If growth disappoints, there is less room for stocks to absorb the bad news.
That’s particularly relevant during the AI boom, where valuations also reflect enormous expectations for future AI spending and profits. If those expectations are exceeded, today’s prices could prove reasonable. If they’re merely met — or fall short — investors could discover that an excellent business isn’t necessarily an excellent investment when too much future success is already priced in.
So far, results are arguably leaning toward “reasonable.” In the first half of 2026, S&P 500 companies have trounced analyst earnings estimates by 29.2% — more than four times larger than the 7.0% five-year average. If that pace keeps up through the end of the earnings season, it will be the largest earnings surprise since tracking began in 2008, surpassing the previous record of 23.2% set in the second quarter of 2020.
The Risk Isn’t Necessarily a Crash
Yet, Burry doesn’t have to be right about an imminent market collapse for today’s valuations to become a problem. Stocks could simply deliver mediocre returns for several years while corporate earnings catch up with share prices.
That’s a much less dramatic outcome than another 2000 or 2008. But for investors buying at today’s valuations, it could still be painful. The S&P 500 doesn’t need to plunge 40% for excessive valuations to hurt. A decade of lackluster returns would also be a significant cost for investors who assumed the bull market’s recent performance would continue indefinitely.
Key Takeaway
Burry’s warnings aren’t a reason to sell everything. Neither is a CAPE ratio of 42.56. But the combination deserves attention.
The market is now just 3.7% from a valuation record set near the height of the dot-com era, while one of Wall Street’s most famous bubble watchers is warning that today’s AI enthusiasm could be taking markets too far.
The bull market doesn’t have to crash for today’s valuations to become a problem. It simply has to stop producing the extraordinary returns investors have come to expect. And at these prices, the margin for error is getting awfully thin.
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