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. Two things to know about this chart. The bands are set CAPE levels — 10, 15, 20 and 30 — so the band a point sits in tells you what the ratio actually is, not where it ranks in the record. The rating is a different cut: it scores CAPE against a fitted long-run trend, because CAPE has drifted structurally higher since the 1990s — lower real rates, tech-heavy index, buybacks — and a long-run mean of ~17 would call nearly every modern reading perpetually overvalued. Each point is ranked against only the history that existed up to that date, so the 1929 top is judged against 1881-1929 rather than against a record containing the dot-com era. On a historical point the two readings can differ, and where they do it is the percentile that carries the drift adjustment. The dotted line shows the full-history mean.