High S&P 500 valuations have historically been associated with lower average returns over long periods, but they do not tell you when the market will fall—or what return you will earn. A high valuation is useful context for setting expectations, not a reliable short-term market-timing signal.
What a high S&P 500 valuation measures
One commonly used measure is the Shiller cyclically adjusted price-to-earnings ratio, or CAPE. It compares the market’s price with a 10-year average of inflation-adjusted earnings. Using a decade of earnings helps smooth out short-lived booms and slumps, but CAPE is still a valuation measure: it describes the price investors are paying relative to a particular earnings base.
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The S&P 500 is an index of 500 leading U.S. companies and represents approximately 80% of available U.S. market capitalization, according to S&P Dow Jones Indices’ index description, accessed October 7, 2026. An index-level CAPE is an aggregate. It does not mean every company in the index is expensive, or that each company faces the same prospects.
Even the choice of constituents can affect the calculation. Research Affiliates’ “Current Constituents CAPE” measure uses the companies that were in the index at each point in the preceding decade, rather than applying today’s membership to historical earnings. Since index membership changes, those methods can produce different historical comparisons.
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What high starting valuations suggest about long-term returns
Historically, higher starting valuations have tended to go with lower average returns over long horizons. The relationship is best treated as a probabilistic anchor: if you begin at a high multiple, it is prudent not to assume that the valuation will keep expanding and add as much to returns as it might from a lower starting point. This does not establish a particular annual return for the next decade.
AQR’s 2025 historical analysis helps explain why valuation matters in realized returns. It examined an exhibit spanning January 1, 1881, through June 30, 2025, and reported the following correlations between decadal realized S&P 500 returns and three measures:
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| Measure compared with decadal realized returns | Reported correlation | What it describes |
|---|---|---|
| Change in 10-year CAPE | 0.93 | A strong historical relationship in this exhibit between realized decadal returns and the change in the valuation multiple. |
| Real earnings-per-share growth | 0.39 | A more modest historical relationship between realized decadal returns and real EPS growth. |
| Change in 10-year average real earnings | 0.09 | A weak historical relationship between realized decadal returns and the change in this earnings measure. |
These are retrospective correlations over the exhibit’s historical period, not forward-return estimates, proof of causation, or a test of how accurately CAPE predicts returns out of sample. They support the view that changes in valuation multiples have been an important component of realized long-period returns. They do not show that those changes can be forecast in advance.
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A useful way to think about equity returns is as a combination of income, underlying growth, and valuation change. AQR’s expected-return discussion treats valuation change as difficult to forecast and uses zero as the simplifying assumption for expected valuation change. That is a modeling convention, not a claim that multiples never change.
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Why high CAPE does not predict an earnings collapse
A high price-to-earnings ratio can be read as a high price relative to earnings, but it does not by itself tell you that earnings are about to fall. In their 2001 study of aggregate annual U.S. data from 1871 to 2000 and quarterly data from 12 countries since 1970, John Y. Campbell and Robert J. Shiller found that valuation ratios did poorly at forecasting future dividend, earnings, or productivity growth. They were more useful for forecasting future stock-price changes.
That distinction matters: a valuation measure’s historical relationship with future returns should not be converted into a claim about what companies will earn. Prices can adjust relative to earnings even when earnings growth is not the source of the change.
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Why CAPE cannot tell you when the market will fall
A high CAPE does not identify a catalyst, date a correction, or set a ceiling on how much higher valuations can go first. Valuations can remain elevated or rise further before a decline. The ratio alone also cannot say how deep a future drawdown might be.
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- High valuation does not guarantee a crash.
- It does not specify when a correction will begin or how large it will be.
- It does not imply a particular annual return for an individual investor or a specific future period.
How to use valuation without turning it into a timing signal
Use CAPE as one input when forming long-term expectations, not as a standalone buy-or-sell rule. Research Affiliates describes Shiller CAPE as an imperfect and incomplete model and cautions against treating it as a “silver bullet”; its approach combines CAPE with other models. The practical implication is to keep a valuation reading alongside other assumptions rather than letting one ratio dictate a portfolio decision.
- Check what the ratio uses. Note the earnings window, inflation adjustment, and whether historical index membership is treated consistently.
- Match the measure to the question. Trailing, cyclically adjusted, and forward-estimate P/E ratios use different earnings bases. A comparison is meaningful only if the base and horizon are clear.
- Separate return components. Distinguish income and earnings growth from a possible change in the valuation multiple. The latter can materially affect realized returns, but is difficult to forecast.
- Keep the horizon explicit. Long-horizon historical associations do not establish a short-term turning point. Do not translate a high reading into a dated market call.
- Remember the aggregate. An index valuation says something about the index as a whole, not the price or outlook of every constituent.
The evidence summarized here does not establish a current CAPE reading or a numerical forecast for future returns. Research Affiliates’ chart endpoint is November 2024, while the cited AQR work is from the second quarter of 2025; neither should be presented as a live October 2026 market reading. A current figure would need to be checked against a dated data source and its calculation method.
The practical takeaway
High starting valuations are a reason to be cautious about assuming unusually strong long-run returns, because valuation multiples can change and have contributed importantly to historical decadal outcomes. But CAPE is not a clock, a crash warning with a deadline, or a reliable short-term trading signal. It can frame expectations; it cannot tell you the path the market will take.
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