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: they're calibrated against a rolling 30-year window, not the full 1871-present history. 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. The dotted line on the chart shows that full-history mean for context.