The CAPE ratio is a way to measure whether the stock market (or an individual stock) is expensive or cheap relative to its long-term earnings. It stands for Cyclically Adjusted Price-to-Earnings ratio, and it’s also called the Shiller P/E after economist Robert Shiller, who popularized it. Unlike the standard P/E ratio, which only looks at one year of earnings, the CAPE ratio averages 10 years of inflation-adjusted earnings to smooth out the booms and busts of economic cycles. The long-term average for the S&P 500 sits at 17.3, dating back to 1881.
How the CAPE Ratio Is Calculated
The formula is straightforward: divide the current share price by the average inflation-adjusted earnings per share over the past 10 years. That 10-year window is the key feature. A standard P/E ratio can look misleadingly low during a profit boom or misleadingly high during a recession, because it only captures a single year of earnings. The CAPE ratio avoids that trap by averaging across an entire business cycle, giving you a more stable picture of what a company or index actually earns over time.
The inflation adjustment matters too. Earnings from 2015 aren’t directly comparable to earnings from 2024 because a dollar bought more back then. By converting all 10 years of earnings into today’s dollars before averaging, the ratio produces an apples-to-apples comparison across time.
What the Number Tells You
A higher CAPE ratio means investors are paying more for each dollar of long-term earnings, which generally signals an expensive market. A lower ratio suggests cheaper valuations. The S&P 500’s historical average of 17.3 provides a useful baseline. The all-time high reached roughly 44, while the low dipped below 5 during periods of extreme pessimism.
Some notable peaks help put today’s numbers in context. In January 1929, just before the Great Depression crash, the CAPE ratio stood at about 27. Before the dot-com bubble burst, it hit 43.8 in January 2000. Before the 2008 financial crisis, it was a more modest 24. As of February 2026, the S&P 500 CAPE ratio sits at 39.8, well above the long-term average and in the same territory as some of the most expensive markets in history.
Why Investors Watch It
The CAPE ratio’s main appeal is its track record of forecasting long-term returns. Research consistently shows a strong negative relationship between the ratio and subsequent stock market performance over the next 5 to 10 years. In plain terms: when the CAPE ratio is high, future returns tend to be low, and when it’s low, future returns tend to be higher. One study of the Greek stock market found a correlation of negative 0.97 between the CAPE ratio and subsequent 10-year returns, an almost perfectly inverse relationship. While U.S. market data isn’t quite that clean, the pattern holds broadly.
This makes the ratio useful as a long-horizon valuation tool. It won’t tell you what the market will do next month or even next year. But if you’re thinking about how your portfolio might perform over the next decade, a CAPE ratio far above historical averages is a meaningful warning sign. Invesco’s modeling, for instance, has suggested that at current elevated levels, annualized capital returns over the next 10 years could land around 0.5%, far below the long-term average of 4.8% since 1871.
How Investors Use It in Practice
Most individual investors don’t use the CAPE ratio to time the market on a day-to-day basis. Instead, it informs broader asset allocation decisions. When the ratio is significantly above its historical average, some investors shift a larger portion of their portfolio toward bonds, international stocks, or cash. When it’s well below average, they may increase their exposure to equities. The logic is simple: buy more when stocks are cheap relative to long-term earnings, and be more cautious when they’re expensive.
Institutional investors use a similar approach. At elevated CAPE levels, major asset managers have recommended underweighting U.S. equities compared to other asset classes. A comparison of yields across stocks, bonds, and cash in early 2025 showed U.S. equities offering the least attractive valuations of the group. That doesn’t mean stocks will crash, just that the expected return per dollar invested is lower than what you’d historically expect.
Why Some Analysts Are Skeptical
The CAPE ratio has real limitations, and some critics argue it consistently makes the market look more expensive than it actually is. The most significant criticism involves changes to accounting standards over the decades. The way companies report earnings today is fundamentally different from how they reported them in the early 1900s. Modern accounting rules tend to overstate earnings declines during recessions. In the last three U.S. recessions (1990, 2001, and 2008-2009), the earnings reported by S&P 500 companies dropped by more than twice as much as actual corporate profits measured by government data. Because the CAPE ratio uses those reported earnings, the 10-year average gets dragged down by exaggerated losses, making the ratio appear higher than it would be with more consistent profit measures.
When researchers substitute government-measured corporate profits for the standard reported earnings, the resulting CAPE ratio is lower and projects higher future stock returns. This suggests the ratio may be somewhat inflated by accounting quirks rather than genuine overvaluation.
Other critics point out that the 10-year lookback window is somewhat arbitrary. A decade that includes the 2008 financial crisis, for example, drags down average earnings for years afterward, making the market look perpetually expensive during the recovery. Corporate buybacks also complicate matters: when companies repurchase their own shares, earnings per share rise without any actual improvement in profitability, which can make the ratio harder to interpret.
Why It Stays Elevated
The CAPE ratio has spent much of the past decade well above its historical average, which has led some researchers to ask whether the old benchmark of 17.3 is still relevant. Several factors could justify structurally higher valuations: lower interest rates over the past 15 years made stocks more attractive relative to bonds, the shift toward asset-light technology companies has raised profit margins across the index, and broader access to investing through low-cost index funds has increased demand for equities. Some analysts argue that comparing today’s CAPE to its 140-year average is like comparing today’s economy to one dominated by railroads and steel mills.
That said, the ratio at nearly 40 sits more than double its historical mean, a level that has only been sustained during the dot-com era. Whether that reflects a permanent shift in how markets are valued or a bubble waiting to correct is one of the most debated questions in investing today.