Do Stock Valuations Still Matter? What CAPE Tells You About the Next Decade

The S&P 500 Shiller P/E sat at 40.53 on April 29, 2026 per Multpl, the second-highest reading in U.S. stock market history after the late-1990s dot-com peak of about 44. Comparable European and emerging-market valuations are roughly half that. Investors are right to ask whether stretched U.S. valuations still mean anything for forward returns.

Valuations work as a thermostat for long-horizon expected returns. They do not work as an alarm clock for short-horizon timing. The academic literature supports both halves of that statement, and the practical takeaway is the same: lower your forward U.S. return assumptions, diversify globally, but do not abandon equities or try to time the market on CAPE alone.

What CAPE Actually Measures

The Cyclically Adjusted Price-to-Earnings ratio divides today’s S&P 500 price by the average of inflation-adjusted earnings over the past 10 years. Robert Shiller introduced it as a way to smooth the business cycle, so investors do not anchor on recession-trough earnings (which makes the market look cheap) or boom-peak earnings (which makes it look cheap for the wrong reasons). The current Multpl reading is 40.53, with GuruFocus reporting 39.44 on the same data series. The historical median sits around 16; the long-run average is closer to 17.

What the Academic Evidence Supports

Three threads of academic work tie valuations to long-horizon stock returns.

Fama and French (1988) showed that dividend yields forecast future stock returns, with predictive power that rises as the forecasting horizon lengthens. The R-squared on a one-year forecast was small. On a four-year forecast it climbed past 25 percent.

Campbell and Shiller’s “Valuation Ratios and the Long-Run Stock Market Outlook” extended that work using CAPE specifically. They found that CAPE forecasts future price changes, not future earnings or dividend growth. High CAPE predicts low subsequent returns; low CAPE predicts high subsequent returns. The relationship is statistical, not deterministic, and it is most reliable over 10-year-and-longer windows.

Cochrane’s “Discount Rates” (his American Finance Association presidential address) wrapped these findings in a single framework: changes in valuation ratios are best understood as changes in expected returns or discount rates, rather than changes in expected cash flows. Investors demand higher returns when they perceive risk to be elevated, which compresses prices; they accept lower returns when risk feels low, which inflates prices. Today’s high CAPE, in that frame, is a market accepting low forward expected returns.

Why CAPE-as-Timing-Signal Fails

CAPE works poorly for tactical timing. Markets stay expensive (or cheap) for years at a time. CAPE crossed 25 in early 2014 and has not spent meaningful time below it since. An investor who sold when CAPE first breached 25 missed roughly a tripling of the S&P 500.

Research Affiliates’ CAPE Fear addresses this directly: timing strategies based on absolute CAPE levels have been almost uniformly unsuccessful at producing risk-adjusted excess returns. The signal has predictive value over 10-year-plus windows, not over 1-to-3-year windows.

The academic finding has two parts. CAPE predicts long-horizon returns. CAPE does not predict the path the market takes to get there.

The Valid Criticisms of CAPE

CAPE has real weaknesses. Five of them matter at today’s levels.

Backward-looking earnings

A 10-year window can understate today’s earnings power if the index composition has shifted toward higher-margin businesses. Software and platform companies, which now dominate the index, have structurally higher operating margins than the industrial mix that prevailed in earlier decades.

GAAP changes

Accounting standards have changed materially over 100-plus years. Pension treatment, stock-based compensation, goodwill impairment, and revenue recognition have all evolved in ways that affect reported earnings. Comparing 1925 GAAP earnings to 2025 GAAP earnings is approximate at best.

Buybacks have grown

In the 1980s, buybacks were rare. Today they routinely match or exceed dividends. Buybacks reduce share count and inflate per-share earnings. CAPE does not directly account for that source of EPS growth, which makes the ratio look more elevated than it would on a constant-share-count basis.

Profit margins are unusually high

FactSet’s Q1 2026 earnings tracker reported a blended S&P 500 net profit margin of 13.4%, the highest in their data series, which goes back to 2009. High margins can justify higher prices if they are durable. They create downside if they mean-revert toward the long-run average.

Index composition shifts

Research Affiliates’ Current Constituents CAPE argues that standard CAPE is biased by historical companies that have left the index. Their adjusted measure, which uses only the current constituents’ historical earnings, runs notably lower than the headline CAPE. On their measure, today’s S&P 500 is expensive but not as historically extreme as the headline 40.53 suggests.

None of these criticisms invalidate CAPE. They constrain the conclusions a careful investor draws from it. The defensible position is to use CAPE as one input among several, alongside Excess CAPE Yield, implied equity risk premium estimates, and bottom-up forecasts.

Excess CAPE Yield: CAPE in Interest-Rate Context

Robert Shiller, Laurence Black, and Farouk Jivraj proposed Excess CAPE Yield as a way to compare equity valuations to bond yields. The math is simple: invert CAPE to get an earnings yield, then subtract the real 10-year Treasury yield. The remainder is the excess yield equity investors are earning over real bonds.

GuruFocus puts the S&P 500 Shiller Excess CAPE Yield at 1.44% as of April 2026, well below the historical median of 3.31%.

High stock valuations do not automatically mean equities are overpriced relative to alternatives. In 1999, equities were expensive on CAPE, but real bond yields were also high, so the excess yield was low and forward equity returns disappointed. Today the picture rhymes: equities are expensive on CAPE, real bond yields are positive but moderate, and the equity excess over bonds sits below average. Equities do not look like a steal at these levels.

Current Market Context

Three concrete forecasts converge on a consistent picture for U.S. equities.

Vanguard’s 2026 economic and market outlook projects U.S. equity returns of 4 to 5 percent nominal annualized over the next 5 to 10 years, well below the roughly 10 percent long-run historical average. Their full forecast lives at the VCMM return forecasts page.

Damodaran’s January 2026 implied equity risk premium estimate for the S&P 500 is 4.23% using the Treasury bond rate as the risk-free benchmark, near the middle of the historical range (the implied ERP at the 1999 dot-com peak was below 2 percent).

Vanguard separately identifies non-U.S. developed equities, U.S. value, and U.S. small-cap as more attractively valued than U.S. large-cap growth (where to find value). The expensive part of the U.S. market is concentrated in the largest growth-oriented names. The rest of the world sits at much lower valuations.

The combined picture: U.S. large-cap growth is the part of the market that looks expensive, and the rest of the world looks comparatively cheaper.

What to Do at High CAPE

Four moves are defensible at today’s valuations.

Lower your forward U.S. return assumptions

A retirement model that uses 10 percent nominal for U.S. equities at CAPE 40 is aggressive given the academic evidence linking CAPE to long-horizon returns. Vanguard’s 4 to 5 percent projection sits at the lower end of the plausible range; even 6 to 7 percent nominal would be more defensible than the long-run 10 percent. Lower assumptions produce more conservative withdrawal rates and earlier required savings.

Diversify globally

The case is the one our global diversification guide makes: U.S. dominance is the exception across modern financial history, and the rest of the world trades at materially lower valuations. Owning the world dilutes the concentration risk in the most expensive part of it.

Consider value or small-cap tilts

The case for small-cap value leans on a separate body of evidence (Fama-French size and value factors). At CAPE 40 the practical effect is the same: more of your equity exposure sits in cheaper corners of the market. Small-cap value comes with painful drawdowns, so size the tilt to what you can hold through a long stretch of underperformance.

Take bonds seriously when real yields are reasonable

A high-CAPE environment with positive real bond yields is a different problem from a high-CAPE environment with zero or negative real yields. The 10-year TIPS yield sat above 2 percent real for most of 2025 and 2026. That is a genuine alternative for cash earmarked for medium-term goals, especially in tax-advantaged accounts. (Schwab’s overview of stock valuation tools is a useful primer on the broader set of valuation indicators analysts watch alongside CAPE.)

Try It: The Expected Return Calculator

The calculator below decomposes the long-run expected return into three components: shareholder yield, nominal earnings growth, and the annualized impact of multiple change. Adjust the inputs to see how Vanguard’s 4-5% forecast falls out of reasonable assumptions, and what real growth would be required to hit a 7 or 9 percent target.

Frequently Asked Questions

Is CAPE useful at all?

Yes, for long-horizon expected returns. Campbell and Shiller’s evidence shows R-squared rising materially as the forecasting horizon lengthens to 10 years and beyond. CAPE is not useful for predicting market direction in the next year, the next two years, or even the next five.

Why has CAPE looked expensive for 15+ years?

A combination of falling real interest rates, expanding profit margins, and the rise of high-margin software and platform businesses in the index. None of these are guarantees of permanently elevated CAPE; some are reversible. Falling real rates compressed equity discount rates between 2009 and 2021. Real rates have since risen, which is why Excess CAPE Yield has fallen even as CAPE itself has stayed elevated.

Should I sell stocks when CAPE is high?

Selling on CAPE level alone has produced poor results historically. Tactical timing based on CAPE thresholds has missed long bull runs. The defensible response to high CAPE is to lower your forward return assumptions and diversify, not to exit equities entirely.

How is Excess CAPE Yield different from regular CAPE?

CAPE is an absolute measure of equity valuation. Excess CAPE Yield compares equity valuation to bond yields. In 2009, both CAPE and Excess CAPE Yield favored equities (low CAPE, high earnings yield, low bond yields). In 1999, CAPE said sell and Excess CAPE Yield was even more emphatic because real bond yields were also high. Today, CAPE looks expensive in absolute terms, and Excess CAPE Yield says equities are roughly half as attractive vs. bonds as the historical median.

Are profit margins permanently higher now?

Possibly higher than the 20th-century average, but probably not as high as today’s 13.4% level. The S&P 500’s index composition has shifted toward higher-margin businesses, which justifies some structural margin expansion. The current level still sits well above the post-2009 trend, and the Q1 2026 reading was a record. Margin assumptions in your planning model should sit somewhere between today’s level and the long-run average.

What return should I assume for U.S. stocks over the next decade?

Reasonable assumptions sit in the 4 to 7 percent nominal range given current CAPE. Vanguard’s 4-5% is at the lower end. If you assume CAPE stays elevated and margins do not compress, 6 to 7 percent is plausible. Anything above 8 percent requires a story (margin expansion, sustained AI-driven productivity, the multiple stays at 40) that you should be able to articulate before relying on it.

Related Guides

• The S&P 500 Is Passive for You, But Not Under the Hood covers what the S&P 500 actually is, the index these valuations describe.
• Stocks Are Always Risky covers the long-horizon equity premium and why time alone does not eliminate equity risk.
• The Case for Global Equity Diversification addresses the U.S.-vs-ex-U.S. valuation gap that today’s CAPE makes more salient.
• Safe Withdrawal Rate explains why forward-return assumptions feed directly into sustainable retirement spending.
• Sequence of Returns Risk explains why retirees starting at high valuations face the worst case.
• Lifecycle Asset Allocation covers age-based equity exposure decisions, which are themselves a function of forward expected returns.
• Do 200 Years of Stock Returns Still Matter? handles the upstream regime-comparison question and shows why a planning baseline of 4 to 5 percent real beats anchoring on the U.S. 20th-century average.
• What Real Return Should You Assume for Stocks? is the focused numerical companion: where each historical number comes from, why the global geometric mean lands near 5 percent, and what that means for your planning baseline.
• The Stock Market Rewards Optimists, But Not the Naïve Ones distills Dimson’s 2026 Rational Reminder interview and includes a stress tester that builds expected real return from the bond yield plus an equity risk premium.

Key Takeaways

• CAPE works as a long-horizon expected-return signal. The Fama-French, Campbell-Shiller, and Cochrane literature supports that link in 10-year-plus forecasts.
• CAPE works poorly as a short-horizon timing signal. Tactical entry/exit rules based on CAPE thresholds have missed long bull runs.
• The S&P 500’s CAPE was 40.53 on April 29, 2026, second only to the dot-com peak. Excess CAPE Yield was 1.44%, below the 3.31% historical median.
• Vanguard’s 4-5% nominal forecast and Damodaran’s 4.23% implied ERP both reflect the conclusion that forward U.S. equity returns are likely to land below the 10 percent long-run average over the next 5 to 10 years.
• The four practical responses are to lower your forward U.S. return assumption, diversify globally, consider value or small-cap tilts, and treat positive-real-yield bonds as a genuine alternative for medium-term goals.