A dot-com-level CAPE won't time the market, but it should change your math

Is the stock market's most famous valuation gauge screaming "sell," or just clearing its throat? Our answer: neither. The Shiller CAPE is a terrible stopwatch and a pretty good map, and the two are easy to confuse.

What the gauge says

The numbers are not subtle. According to Katusa Research, the S&P 500's cyclically adjusted price-to-earnings ratio stood at 40.58 as of September 2026, against a long-run average of 17.8. Multpl shows the same reading and a maximum of 44.19 in December 1999. In other words, only the dot-com peak was higher.

The CAPE divides the index price by ten years of inflation-adjusted earnings, which smooths out recessions and boom years. Robert Shiller's dataset runs back to 1871, so the history is long. That is also where the trouble starts: very high readings are rare, so the sample of "times like this" is tiny.

It is a lousy timing tool, and the evidence says so

If CAPE were a good timer, the past decade would have been a disaster for anyone who listened. Katusa's own page concedes that the market spent most of the 2010s above average and kept rising, and that the ratio says nothing about next quarter. A reader who sold early in the name of prudence missed a lot.

There is a deeper statistical caveat. The Prudent Speculator points out that the dreadful five-year results after CAPE readings above 35 come from just 34 rolling periods, all from 1998 to 2000. Because the ratio moves slowly and the windows overlap, the apparent predictive power is "less robust than it might appear," in its words. The same firm's data show that only 5.68% of trading days since 1927 set a new record, yet avoiding market peaks did not give investors a clear performance advantage.

Add a footnote from Shiller's own data page: share buybacks have become a dominant way U.S. companies return cash, which may affect the level of the CAPE, and he publishes an alternative total-return CAPE for that reason. We can't say from this documentation in which direction or by how much the headline number is distorted, and we would distrust anyone who claims to.

The real use: lower your expectations, then rebalance

Where CAPE earns its keep is over long horizons. Lyn Alden's summary of Shiller's work is that returns over the next 20 years are strongly inversely correlated with the starting CAPE. Katusa notes that the two prior episodes at comparable levels, 1929 and the late 1990s, were followed by ten-year returns near zero. Those are two data points, so treat them as a warning about odds, not a forecast.

That is where we land. The most dangerous number in many retirement spreadsheets is, in our view, the assumed 10% a year. Starting from 40x earnings, we think it is more prudent to plan on a meaningfully lower figure, and to find out whether your plan survives it. If it only works at 10%, the plan is the problem, not the market.

The practical response is boring, which is why it works:

• Rebalance on a schedule. After years of strong gains, equities probably make up more of your portfolio than you chose. Returning to your target is not a bet on a crash; it is housekeeping.
• Keep contributing. Burton Malkiel, quoted by the Prudent Speculator, wrote that valuations are rich and long-run equity returns are likely to be lower than recent ones, but that the stock market remains the best vehicle for growing wealth.
• Look beyond the headline index. The same firm shows the cap-weighted S&P 500 trailing P/E at 26.1 on June 30 (2024 data) versus 19.6 for its equal-weight version. Concentration is part of the story. And the research Alden cites, from Meb Faber, suggests the cheapest markets by CAPE beat the S&P 500 between 1993 and 2018, though that is past performance and no promise.

Who loses here? Anyone who treats a valuation chart as a trading signal, in either direction: the permanent bears who may be "right" about valuations while missing years of gains, and the optimists who assume recent returns are a law of nature.

Our verdict: don't sell because of the CAPE, and don't ignore it either. Use it to shrink your return assumptions, check that your allocation still matches your risk tolerance, and rebalance. This is general analysis, not personal advice, and tax rules on rebalancing differ by country and account type, so check yours first.