At the market's 2000 peak, the S&P 500's Shiller P/E hit roughly 44 — right before a decade of flat returns — and the same gauge that flagged it warns against valuing a cyclical like Nvidia (NVDA) on peak earnings today. In 2026, with stocks at fresh highs, CAPE is flashing again.
What is the CAPE ratio?
The CAPE ratio — short for Cyclically Adjusted Price-to-Earnings — is a valuation measure that divides a stock or index price by its average inflation-adjusted earnings over the past 10 years. It is also known as the Shiller P/E or P/E 10.
It was popularized by Yale economist Robert Shiller, who shared the 2013 Nobel Prize in economics, alongside collaborator John Campbell. Their insight was simple but powerful.
A standard price-to-earnings ratio uses a single year of earnings, which can be wildly distorted by where you are in the business cycle. CAPE fixes that by averaging a full decade.
By smoothing 10 years of earnings, CAPE strips out the boom-and-bust noise that makes a one-year P/E so easy to misread at the top or bottom of a cycle.
How is the CAPE ratio calculated?
You take the real price and divide it by 10-year average real earnings. In practice that means adjusting both the price and each of the trailing 10 years of earnings for inflation, then dividing.
The formula is: CAPE = Real Price ÷ Average of 10 Years of Real Earnings.
Because it uses a decade of profits, a single blowout year or a single loss barely moves the number. That is the whole point — it answers "what are investors paying for a normalized stream of earnings?" rather than "what are they paying for this year's earnings?"
The long-run average CAPE for the S&P 500 is roughly 16 to 17. The 1929 peak reached about 30, and the 2000 dot-com peak stretched to around 44 — both of which preceded painful drawdowns.
For the underlying math behind price-to-earnings measures, our fundamental analysis hub covers the standard ratios first.
What is the CAPE ratio telling investors in 2026?
It is flashing caution. With the S&P 500 at fresh highs in 2026, the index CAPE has hovered in the mid-30s — roughly double its long-run average of around 16 to 17.
Historically, readings this elevated have been followed by below-average real returns over the subsequent decade. The relationship is statistical, not mechanical: a high starting valuation leaves less room for multiple expansion and more room for disappointment.
But — and this matters — CAPE is a long-horizon signal, not a market-timing tool. It has been above its historical average for well over a decade while U.S. stocks kept climbing.
A stretched CAPE tells you the odds of strong 10-year returns are lower, not that a crash is imminent — the gauge has been "expensive" for years while the market marched higher.
How do you apply CAPE to individual stocks?
You apply it by normalizing a company's earnings across a full cycle, which matters most for cyclical businesses. For companies whose profits swing wildly, this quarter's earnings — and therefore the trailing P/E — can be deeply misleading.
Consider energy. Exxon Mobil (XOM) and Chevron (CVX) can look statistically cheap on a low trailing P/E precisely when oil prices — and their earnings — are peaking. When the cycle turns, those "cheap" earnings evaporate.
The same trap applies to semiconductors. Buying Nvidia (NVDA) or AMD (AMD) on a low forward multiple built on peak-cycle demand is exactly the mistake CAPE is designed to catch.
| Stock |
Earnings profile |
Trailing P/E can... |
CAPE-style caution |
| Exxon Mobil (XOM) |
Cyclical (energy) |
Look cheap at the peak |
Normalize over the cycle |
| Chevron (CVX) |
Cyclical (energy) |
Look cheap at the peak |
Normalize over the cycle |
| Nvidia (NVDA) |
Cyclical (semis) |
Understate risk at peak |
Average through the cycle |
| AMD (AMD) |
Cyclical (semis) |
Swing with margins |
Average through the cycle |
| Apple (AAPL) |
Stable (consumer tech) |
Be broadly reliable |
CAPE roughly tracks P/E |
| Microsoft (MSFT) |
Stable (software) |
Be broadly reliable |
CAPE roughly tracks P/E |
For stable compounders like Apple (AAPL) and Microsoft (MSFT), a normalized CAPE and a trailing P/E tell nearly the same story, because their earnings do not gyrate with the cycle.
What are the criticisms of the CAPE ratio?
The strongest criticism is that accounting has changed. GAAP write-offs during the 2008 crisis crushed reported earnings and left the 10-year average artificially depressed for years afterward, inflating CAPE well after the crisis passed.
A second critique is that structurally lower interest rates and higher profit margins may justify a permanently higher CAPE than the historical average. If the "fair" multiple has shifted up, comparing today's reading to a century-old average overstates how expensive stocks really are.
A third is practical: CAPE has almost no short-term predictive power. Acting on it too early has cost investors a decade of gains, which is why critics call it a better academic gauge than a trading signal.
Value-minded investors profiled in our investors section tend to treat CAPE as one input among many, never a standalone buy or sell trigger.
How should you actually use CAPE?
Use it to set expectations, not to time trades. A high CAPE is a reason to expect more modest long-run returns and to demand a larger margin of safety — not a reason to sell everything and sit in cash.
Pair it with the cycle-normalization mindset for individual stocks. Before buying a cyclical on a tempting low P/E, ask whether this year's earnings are near a peak or a trough, and what a mid-cycle number would look like.
Finally, watch the trend, not just the level. A CAPE drifting higher into euphoria is a different signal than one resetting lower after a correction — and combining it with the broader toolkit in our investment strategies guide gives it far more context than the number alone.
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