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The CAPE ratio compares a broad stock-market price index with about a decade of inflation-adjusted earnings. It helps put valuations in long-run context, but it cannot tell investors when prices will fall or reliably predict next year’s market return.
What the CAPE ratio measures
CAPE stands for cyclically adjusted price-to-earnings. It is also called the Shiller P/E or P/E10. Unlike a conventional price-to-earnings ratio that uses one year of earnings, CAPE uses an average of roughly ten years of earnings adjusted for inflation. This smooths some of the effect of booms and recessions on the earnings figure.
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In plain terms, a higher CAPE means investors are paying more for each unit of the market’s earnings over the preceding decade. Whether that is unusually high depends on the index, calculation method, historical comparison period, and economic conditions.
How CAPE is calculated
A simplified formula is:
CAPE = market price index ÷ average of the previous ten years of inflation-adjusted earnings
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To adjust earnings for inflation, figures from earlier years are restated in current purchasing-power terms before they are averaged. This makes earnings from different points in the decade more comparable.
Robert Shiller’s historical series uses monthly stock-price, earnings, dividend, and consumer-price data dating back to January 1871. On that page, prices are monthly averages of daily closes. Since 1926, monthly dividend and earnings observations are computed from S&P four-quarter totals and linearly interpolated; earlier figures draw on historical Cowles data and annual observations. The CPI-U series begins in 1913, with an earlier historical price-index splice used for inflation adjustment. These details matter: other providers may use different index coverage, earnings conventions, inflation series, or timing, so their CAPE readings are not necessarily interchangeable. Shiller’s official data and methodology
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What a high CAPE can—and cannot—tell you
It gives valuation context
A high CAPE says the market price is high relative to the chosen decade of real earnings. Historical studies have associated higher starting valuations with lower average returns over some long horizons. That is a relationship across periods, not a promise about the return an investor will receive.
It is not a short-term warning light
CAPE does not say when a decline will begin. Valuations can remain elevated or rise further, and Vanguard cautions against treating them as a market-timing tool or making drastic asset-allocation changes on valuation alone. Invesco’s March 2025 analysis found practically no relationship between its CAPE measure and one-year-forward S&P 500 returns over 1983–2024. Vanguard’s discussion of U.S. equity valuations · Invesco’s review of Shiller P/E and S&P 500 returns
Long-horizon findings depend on the sample
In the same Invesco report, the relationship between Shiller P/E and 10-year forward returns had an R² of 0.78 in the 1983–2015 sample, but fell to 0.10 when the analysis used the full history since 1881. These are results from a particular analysis, not universal measures of forecast accuracy. Invesco also noted that average Shiller P/E levels were higher after 1983 than during 1953–1983. A single historical average is therefore not a timeless definition of fair value.
Why the economic setting and calculation matter
- Interest rates and inflation: Discount rates affect how investors value future earnings. Vanguard explains that low interest rates can support higher valuations; a raw CAPE comparison does not adjust for every change in the economic setting. Vanguard’s valuation discussion
- Share repurchases and payouts: Changes in how companies return cash to shareholders can affect earnings per share and the conventional CAPE denominator. Shiller documents a total-return CAPE variant intended to address changing payout practices, including buybacks. Keep the index and CAPE version consistent when comparing values. Shiller’s data page and CAPE notes
- Index and earnings definitions: A reading depends on which market index and earnings measure are used, as well as the inflation adjustment and observation timing. Check that two readings use the same conventions before comparing them.
- Other drivers of returns: Valuation is only one contributor to total return; earnings growth, dividends, and currency effects also matter. Vanguard’s 2026 discussion describes valuations as poor short- and intermediate-term predictors and considers valuation percentiles through June 30, 2026. Vanguard’s 2026 discussion of U.S. market value
How to use CAPE without overreading it
- Check the date and source. A CAPE figure is an observation or estimate tied to a date, not a timeless market fact.
- Check the method. Confirm the index, earnings basis, inflation adjustment, and CAPE variant; do not assume two providers calculate it identically.
- Match the question to the horizon. CAPE can help frame long-term valuation expectations, but it is not a dependable tool for deciding when to buy or sell over the next year.
- Consider the wider setting. Rates, inflation, payout policy, earnings growth, dividends, and currency effects all shape how valuation relates to future returns.
- Avoid treating a historical average as a target. The relationship changes across samples and market regimes; CAPE alone does not establish fair value or a precise return forecast.
What counts as a current CAPE reading?
Every quoted figure should be accompanied by its date and source. Risk Premium Research Tools showed an estimate of about 41.6 on October 7, 2026, but its method held reported earnings flat after June 2026 and scaled the estimate with price and the deflator. It is an unofficial price-scaled estimate, not a confirmed October observation from Shiller’s official monthly dataset. Risk Premium Research Tools’ estimate and methodology
Shiller’s official page provides the underlying historical data, but the figure above has not been independently verified as the latest official monthly reading. Readers who need an exact official value should check the dataset’s release date and calculation rather than treating a third-party estimate as Shiller’s current CAPE. For background on the thinking behind the measure, Shiller’s Irrational Exuberance is optional reading, not a requirement for understanding or calculating CAPE. Shiller’s official data page
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