Published October 9, 2026
The Cyclically Adjusted Price-to-Earnings (CAPE) ratio, also known as the Shiller PE, is one of the most widely regarded measures for evaluating long-term stock market valuations. Developed by Yale Professor Robert Shiller, it was first presented in his 1988 research paper, “Stock Prices, Earnings, and Expected Dividends.” Shiller famously leveraged the ratio in his book Irrational Exuberance to accurately predict the popping of the dot-com bubble.
Mechanically, the CAPE ratio improves upon the traditional price-earnings ratio by dividing the current price of an equity index, such as the S&P500, by the 10-year moving average of its inflation-adjusted earnings. Standard PE ratios can be deceptive; during economic booms, corporate profit margins skyrocket, making stocks appear artificially cheap. Conversely, during deep recessions, the collapse in earnings causes the standard PE to spike, making a market bottom look incredibly expensive. By averaging earnings across a full decade, the CAPE ratio smooths out short-term business cycle volatility, giving investors a clearer look at sustainable corporate earning power.
Today, the S&P500 Shiller PE ratio has reached 41.3, an extreme level in the 99th percentile of all historical readings. The long-term historical mean over nearly 150 years is ~17.4. The current reading places today’s market at more than double its historical norm. In fact, across all modern financial history, the Shiller PE has exceeded 40 during only three major market extensions: (1) the dot-com bubble peak — where it reached its all-time record high of 44.2, (2) briefly during the post-pandemic tech surge of late 2021, and (3) during the current AI-driven bubble stretching from late 2025 until now.
Historically, the CAPE ratio exhibits a powerful inverse correlation with subsequent 10-to-20-year market returns. When the starting CAPE ratio is exceptionally low (such as its 1982 low of 7.4 or its 2009 post-financial crisis trough of 13.3), the market goes on to generate stellar double-digit annualized returns over the following decade. However, when the CAPE ratio sits above 30, it has consistently heralded extended periods of sub-par performance or eventual steep valuation corrections, as seen after 1929 and 2000. Because the current reading is above 41, the implied long-term real (after inflation) market return for the S&P 500 the implied 10-year market return is a meager 1.6% per year.
It’s important to emphasize that the CAPE ratio is a poor short-term market-timing tool. An elevated ratio does necessarily not mean a market crash is imminent tomorrow or next month; markets can remain highly extended for months or even years. However, for long-term investors, the current historically high valuations serve as a clear warning that buying into US equities at today’s prices very likely means accepting a lower margin of safety and lower future returns over the coming decade.
Market Update
Monday, stocks moved higher following momentum from a weaker-than-expected payroll report late the previous week reducing the probability of an October Fed rate hike. Growth and technology sectors led the market, pushing the MAG7 tech stock to reach a collective record valuation. The S&P 500 rose +0.66%, the NASDAQ 100 was up +0.87% and even the Russell 2000 closed with a +0.50% gain.
On Tuesday the S&P 500 recorded its first record close in two months, accompanied by an all-time high for the NASDAQ. The S&P 500 gained +0.58%, the NASDAQ 100 increased +0.48% however the Russell 2000 fell -0.59%.
Wall Street’s multi-day winning streak snapped on Wednesday as overbought conditions caused the tech-fueled AI rally to lose steam. Bond yields ticked higher, with the 10Y treasury yield trading near 5.35%. Geopolitical uncertainty pushed oil prices higher. The S&P 500 and the NASDAQ 100 both sagged -0.2% while the Russell 2000 plummeted -1.31%.
Thursday, a sharp wave of selling hammered tech and semiconductor stocks after a report revealed OpenAI’s annualized revenue is tracking roughly $20 billion below previous estimates. Meanwhile, weekly jobless claims fell to 197,000, signaling a tight employment market that could prompt the Fed to hike interest rates in December. Spiking oil prices due to escalating Middle East tensions and hurricane worries further dampened sentiment. Toward the end of the day, SpaceX announced the acquisition of radio frequency spectrum licenses that will enable them to launch cellular service potentially upending the global cellular service market and enabling them to compete with Verizon and AT&T among others. Anxious investors sold stocks. The S&P 500 fell -0.47%, the NASDAQ 100 cratered -1.39%, however the Russell 2000 was relatively unscathed only falling -0.08%.
Friday the major indices rose as buyers stepped in to reverse the panic over OpenAI revenues. Telecom stocks however sold off hard, reeling from the likely entry of SpaceX into the mobile telecom business. AT&T crashed -9.8%, Verizon fell -8.8 % and T-Mobile tanked -13.3%. Notably rates crept back up, with the 10Y closing over 5.2%. Oil closed flat at $91.48 despite hurricane fears and increased tanker attacks in the Persian Gulf. The major indices all rose about half a percent on the day.
For the week, there was quite the dispersion in returns with the S&P500 (SPY) leading the way up +1.15% and the NASDAQ 100 (QQQ) squeaking out a +0.24% gain while the Russell 2000 small cap index (IWM) fell for the fifth week in a row, finishing down -0.91%.
Warm wishes and until next week.