CAPE Ratio

CAPE — the Cyclically Adjusted Price-to-Earnings ratio, the S&P 500 divided by its 10-year inflation-adjusted earnings average — is one of the best predictors of long-run stock market returns. When the ratio is high, subsequent 10-year returns have historically been weaker, not because a crash is imminent but because you're paying more today for the same stream of future earnings. When CAPE is elevated, investors should temper their long-term return expectations; when it's depressed, the opposite is true. This doesn't help you time the next 12 months, but it directly shapes what a retirement plan can realistically assume from equity returns. One thing to know about the rating bands here: like the Buffett Indicator, they score CAPE against its long-run trend rather than a fixed level, with the spread calibrated on a rolling 30-year window. CAPE has drifted structurally higher since the 1990s — lower real rates, tech-heavy index, buybacks — so the long-run mean of ~17 would call nearly every modern reading perpetually overvalued, and that is why the bands slant upward across the chart instead of running flat. It also means historical peaks are judged against their own era: the 1929 top reads Very High where flat bands, measured against the modern distribution, called it merely High. The dotted line on the chart shows the full-history mean for context.