What is the S&P 500 CAPE?
The cyclically adjusted price-to-earnings ratio, known as CAPE or the Shiller PE, is one of the most respected long-term valuation tools in finance. Standard PE ratios can be misleading because earnings swing wildly over the business cycle, making stocks look cheap at profit peaks and expensive at troughs. Nobel laureate Robert Shiller and John Campbell solved this by averaging ten years of inflation-adjusted earnings, smoothing out the cycle to reveal the underlying valuation. A high CAPE signals that investors are paying a large premium for each dollar of long-run earnings, which historically has predicted lower future returns over the following decade. The ratio reached about 44 at the 2000 dot-com peak, its highest ever, and warned of the lost decade that followed. While a poor short-term timing signal, CAPE has a strong track record of forecasting ten-year forward returns, which is why asset allocators rely on it to set long-term return expectations.
Formula & Methodology
Created by Robert Shiller & John Campbell (1988).
Historical Performance & Limitations
Accounting changes over decades make historical comparisons imperfect. Persistently low interest rates and shifts in sector composition may justify a structurally higher CAPE. It has virtually no short-term predictive power and can stay elevated for years.
Status Classification
| Level | Meaning |
|---|---|
| Strong Undervaluation | Market trading significantly below historical average |
| Fair Value | Market aligned with historical valuation metrics |
| Moderate Overvaluation | Market elevated above historical norms |
| Severely Overvalued | Extreme historical deviation; high downside risk |