The Cyclically Adjusted Price/Earnings (CAPE) ratio, developed by Nobel laureate Robert Shiller, compares the S&P 500’s current price to the 10-year average of inflation-adjusted earnings.
Why does it matter? Because valuations drive long-term returns. History shows:
High CAPE → Lower future returns
Low CAPE → Higher future returns
This month, the CAPE Ratio hit nearly 38—a level only surpassed three times since the dot-com bubble of 1999/2000. What does this mean?
Looking back to 1900:
When CAPE > 37 → The average 10-year cumulative price return is -4.7%, with positive returns only 29% of the time.
Across all periods since 1900 → The average 10-year cumulative return is +87.9%, with positive returns 85% of the time.
This doesn’t mean the market crashes tomorrow — CAPE isn’t a timing tool. But it’s a powerful reminder of the inverse relationship between valuations and long-term performance.
