The CAPE ratio is a way to measure whether the stock market is cheap or expensive relative to its long-term earnings history. It stands for Cyclically Adjusted Price-to-Earnings ratio, and it works by comparing the current price of a stock or index to the average of its inflation-adjusted earnings over the past 10 years. The long-term median for the S&P 500 is about 16, and as of March 2026, it sits at roughly 38.9, more than double that historical norm.
How It Differs From a Standard P/E Ratio
A regular price-to-earnings ratio divides a stock’s price by its most recent year of earnings. The problem is that earnings swing dramatically with the economy. During a boom, earnings spike and make stocks look cheap. During a recession, earnings crater and make stocks look impossibly expensive. Neither snapshot tells you much about long-term value.
Benjamin Graham and David Dodd identified this problem back in 1934 in their book “Security Analysis,” recommending that investors divide price by a multi-year average of earnings, suggesting windows of five, seven, or ten years. Yale economist Robert Shiller built on that idea, popularizing the 10-year version that became known as the CAPE ratio or the Shiller P/E. He used it to argue that stocks were dangerously overvalued during the late-1990s dot-com bubble, which turned out to be correct.
How the CAPE Ratio Is Calculated
The formula itself is straightforward: divide the current price of the S&P 500 by the average of its annual earnings per share over the prior 10 years, with both the price and every year of earnings adjusted for inflation using the Consumer Price Index. That inflation adjustment matters because a dollar of earnings in 2016 isn’t worth the same as a dollar of earnings in 2026. Without it, older earnings would be understated and the ratio would be artificially high.
By averaging a full decade of earnings, the CAPE smooths out the peaks and valleys of the business cycle. A company that earned a fortune during a boom and lost money during a bust gets evaluated on its full-cycle performance rather than whichever extreme happens to be most recent.
What the Number Actually Tells You
A CAPE of 16 (the historical median for the S&P 500) means investors are paying $16 for every $1 of average decade-long, inflation-adjusted earnings. A CAPE of 39 means they’re paying $39 for that same dollar. The higher the ratio, the more expensive the market is relative to what companies have actually earned.
The ratio’s real strength is as a long-term forecasting tool. Research across multiple countries has consistently found that when the CAPE is low (below 15), subsequent returns over the next 5 to 10 years tend to be strong. When it’s high, future returns tend to be weaker. Shiller himself has described the relationship between current CAPE levels and future returns as too strong to be consistent with the idea that markets move randomly. A 2012 study by Joachim Klement examined 35 countries, including emerging markets, and found the CAPE to be a reliable long-term valuation indicator across all of them.
What it does not do is predict short-term market moves. The market can stay expensive for years. A high CAPE doesn’t mean a crash is coming next month. It means the price you’re paying today for stocks is elevated, and the return you can expect over the next decade is likely to be lower than average.
Historical Highs and Lows
The S&P 500’s CAPE has ranged from a record low of 4.78 to a record high of 44.2. That peak came during the dot-com bubble in late 1999 and early 2000, just before the market lost roughly half its value over the next two and a half years. The lowest readings occurred during periods of deep economic crisis, when stocks were genuinely bargain-priced and subsequent returns were enormous.
Something worth noting is that the average has shifted over time. Between 1953 and 1983, the CAPE averaged 15.6. From 1983 to early 2025, it averaged 24.5. Whether this reflects a permanent structural change in how markets are valued or a prolonged period of overvaluation is one of the most debated questions in finance.
CAPE Ratios Around the World
The CAPE isn’t limited to U.S. stocks. As of late 2025, Research Affiliates data showed the U.S. CAPE at roughly 39, developed markets overall at about 31.5, and emerging markets at around 18.9. The global figure sat near 29.4. Each region has its own historical median: the U.S. median is about 16.5, developed markets around 24, and emerging markets roughly 15.2.
One important rule of thumb: you should only compare a country’s CAPE to its own historical average. Comparing the U.S. CAPE to India’s CAPE doesn’t work because different markets have different structures, growth profiles, and investor bases. What matters is whether a given market is expensive or cheap relative to its own history.
Why Some Analysts Question It
The CAPE ratio has real limitations. The biggest criticism involves accounting changes. U.S. companies now report earnings under different rules than they did decades ago. Practices like marking assets to their current market value (rather than the price originally paid) tend to make reported earnings more volatile, especially during downturns. This means the denominator of the CAPE, the 10-year average of earnings, may be artificially depressed by accounting write-downs that didn’t exist in earlier eras. The CFA Institute has noted that this could make recent CAPE readings overly pessimistic about future returns.
Another issue is that the ratio uses reported earnings, which include one-time charges, restructuring costs, and other items that don’t reflect a company’s ongoing business. Some analysts prefer versions that use operating earnings instead, though Shiller’s original formulation sticks with reported figures.
There’s also the question of whether the CAPE’s long-term average is the right benchmark anymore. Interest rates spent much of the 2010s and early 2020s near historic lows, which can justify higher stock valuations because bonds and savings accounts offer less competition for investor dollars. If the “normal” CAPE has genuinely shifted upward, then a reading of 39 may not be as alarming as it looks against a median of 16.
How Investors Use It in Practice
Most investors use the CAPE as a temperature check rather than a trading signal. If you’re deciding how much of your portfolio to put into stocks versus bonds, a CAPE well above historical norms suggests that stocks are priced to deliver below-average returns over the next decade. That might lead you to diversify more broadly, perhaps into international markets where CAPE readings are lower, or to simply set more realistic expectations for your portfolio’s growth.
Some financial planners use CAPE-based frameworks to categorize the market as overvalued, fairly valued, or undervalued. Using the historical U.S. average of roughly 16 as a midpoint, a CAPE below 12 would suggest deep value, while a CAPE above 20 would suggest overvaluation. By that standard, the U.S. market has been in “overvalued” territory for most of the past four decades.
The ratio works best as one input among many. It tells you something real about the price you’re paying for a stream of earnings, but it can’t account for shifts in interest rates, tax policy, technological change, or the dozens of other forces that drive stock prices over any given decade.