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The CAPE ratio compares a stock-market price index with about 10 years of inflation-adjusted earnings. It helps put today’s price in the context of a full business cycle, but it cannot tell you when the market will fall—or reliably predict next year’s return. Its meaning depends on the index, earnings measure, calculation method, economic conditions and time horizon.
What the CAPE ratio measures
CAPE stands for cyclically adjusted price-to-earnings. It is also known as the Shiller P/E or P/E10. The conventional measure divides a market price index by the average of the preceding 10 years of inflation-adjusted earnings. Earnings from earlier years are restated in current purchasing-power terms before they are averaged.
Using a decade of earnings rather than only the most recent year reduces the effect of unusually strong or weak profits at one point in the business cycle. That makes CAPE a measure of price relative to a smoothed earnings history—not a direct statement about what a stock or market is worth.
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A simplified formula is:
CAPE = market price index ÷ average of the previous 10 years of inflation-adjusted earnings
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The familiar Shiller series has a specific historical construction. Robert J. Shiller’s official data page documents monthly stock-price, earnings, dividend and consumer-price data beginning in January 1871. Prices are monthly averages of daily closes. Since 1926, monthly dividend and earnings observations are computed from S&P four-quarter totals and linearly interpolated; earlier figures draw on historical Cowles data and are interpolated from annual observations. The CPI-U inflation series begins in 1913, with an earlier historical price-index splice used before then.
Providers can differ in index coverage, earnings conventions, data timing and inflation measures. Alternative CAPE calculations are therefore not necessarily numerically interchangeable. When comparing readings, check that the underlying index, earnings definition, inflation adjustment and CAPE version match.
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What a high CAPE does—and does not—say
A higher reading means investors are paying more for each unit of the previous decade’s real earnings than they would at a lower reading. Historical studies have associated higher starting valuations with lower average returns over some long horizons. That is a relationship observed in particular data and periods, not a promise about future returns.
CAPE is not a countdown to a correction. Valuations can remain high or rise further, and a high reading alone does not establish that a market decline is imminent. Vanguard’s February 2024 discussion describes valuations as unsuitable for market timing and cautions against drastic asset-allocation changes based on valuation alone. The market figures in that article refer to January 2024, not current conditions.
Why the forecast horizon changes the answer
Invesco’s March 2, 2025 analysis, using data through February 28, 2025, found practically no relationship between its CAPE measure and one-year-forward S&P 500 returns over its 1983–2024 sample. Its results were stronger for 10-year-forward returns in a selected period: the reported R² between Shiller P/E and 10-year-forward returns was 0.78 for 1983–2015. Using the full history since 1881, that R² fell to 0.10. These are sample-specific statistical results, not measures of guaranteed forecast accuracy.
The same analysis found average Shiller P/E levels were higher after 1983 than during 1953–1983. That difference matters: a historical average is not automatically a timeless fair-value threshold. What CAPE can contribute to a long-term discussion depends partly on the period used and the horizon being considered.
What else affects interpretation
Interest rates and inflation
Interest rates influence the discount rate investors apply to future earnings, while inflation shapes how nominal earnings and prices are interpreted. A given CAPE reading can therefore have a different context under different macroeconomic conditions. Vanguard’s analysis explains why lower rates can support higher valuations and describes a model that adjusts CAPE for inflation and interest rates. A raw comparison with a long-run average does not account for every such condition.
Share repurchases and payout practices
Changes in how companies return cash to shareholders can affect earnings per share and the denominator used in conventional CAPE. Shiller’s data page documents a total-return CAPE variant intended to address the effect of changing payout practices, including share repurchases. The version used should be identified when comparing figures.
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Portfolio decisions and other return drivers
Valuation is only one contributor to investment returns. Vanguard’s 2026 discussion also identifies earnings growth, dividends and currency effects, and characterizes valuations as poor short- and intermediate-term predictors. CAPE can supply context, but it does not replace a broader view of an investment’s risks, goals or expected return drivers.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to use a CAPE reading responsibly
- Identify the measure. Check which index, earnings basis, inflation series and CAPE variant the figure uses.
- Keep comparisons consistent. Do not compare readings from different methods as if they were the same series.
- State the date and source. A current-looking figure may be an estimate rather than an official monthly observation.
- Match the horizon to the question. CAPE offers little evidence for precise short-term timing; long-horizon associations vary by sample.
- Use it as context, not a trigger. Avoid treating one threshold as a certain signal to buy, sell or change an allocation.
Is there a current CAPE reading?
Risk Premium Research Tools displayed an estimate of about 41.6 for October 7, 2026. It is an unofficial, price-scaled estimate: the site says earnings data are available only through June 2026 and later months hold earnings flat while the estimate moves with price and the deflator. It is not verified as an October observation in Shiller’s official monthly dataset. Shiller’s data page is the primary source for the historical series, but a precise latest official value should be tied to the dataset’s release date and calculation rather than inferred from that third-party estimate.
For background on the history and psychology of market valuations, Shiller’s official data page also identifies his book Irrational Exuberance; reading it is optional and not necessary to calculate CAPE.
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