High starting valuations have historically been associated with lower average returns over long periods, but they do not reliably tell investors when a decline will begin or what return they will earn. Shiller CAPE is useful context for thinking about long-term expectations—not a market-timing clock or a guarantee of a crash.
What a high S&P 500 valuation means
A valuation measure compares a market price with some measure of company earnings. When the price is high relative to earnings, investors are paying more for each dollar of those earnings. Historically, a higher starting valuation has tended to accompany lower average returns over long horizons. That relationship is probabilistic: it describes a broad historical tendency, not a dependable forecast for a particular year or investor.
The S&P 500 is an index of 500 leading U.S. companies and represents approximately 80% of available U.S. market capitalization, according to S&P Dow Jones Indices’ index description accessed October 7, 2026. An index-level valuation is an aggregate. It does not mean that every company in the index is expensive or shares the same prospects.
How Shiller CAPE is calculated
Shiller CAPE, or cyclically adjusted price-to-earnings ratio, compares the current market price with a 10-year average of inflation-adjusted earnings. Using a decade of earnings is intended to make the denominator less sensitive to the ups and downs of a single business cycle than a one-year earnings measure.
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The calculation’s treatment of index membership matters. Research Affiliates describes its S&P 500 CAPE measure as using the constituents that were in the index at each point over the preceding decade, rather than applying today’s membership retroactively. Since companies enter and leave the index, those methods do not produce an identical historical series.
CAPE is one way to describe valuation, not a complete model of future returns. Research Affiliates characterizes it as imperfect and incomplete and cautions against treating it as a stand-alone predictor. The cited material does not establish a universally superior valuation measure.
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Why valuation changes matter to realized returns
Equity returns can be understood through three broad contributors: income, growth in the underlying business or earnings, and changes in the valuation investors assign to those earnings. AQR’s expected-return discussion notes that valuation change can be important in realized returns but is difficult to forecast in advance; its simplified framework assumes no change in valuation when setting expected returns.
AQR’s 2025 historical analysis reports the following correlations for an exhibit spanning January 1, 1881, through June 30, 2025. These are retrospective relationships between decadal realized S&P 500 returns and the listed measures, not estimates of future returns or evidence of out-of-sample forecast accuracy.
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1Clear out junk files and repair common Windows errors2Fix the driver behind crashes, sound loss and screen glitches3Repair Windows errors before they cause bigger problems| Measure compared with decadal realized S&P 500 returns | Reported correlation | What the figure describes |
|---|---|---|
| Change in 10-year CAPE | 0.93 | Historical correlation in AQR’s exhibit over January 1, 1881–June 30, 2025; not a forward-return estimate. |
| Real EPS growth | 0.39 | Historical correlation in the same exhibit and period; not a forward-return estimate. |
| Change in 10-year average real earnings | 0.09 | Historical correlation in the same exhibit and period; not a forward-return estimate. |
The strong historical association with CAPE changes is a reminder that realized returns reflect not only earnings and income but also how investors’ valuation of the market shifts. It does not show that a future shift can be predicted, or that the historical relationship will persist unchanged.
What high CAPE does not predict
It does not date a correction
A high CAPE does not tell you when a market decline will start. Valuations can stay elevated or rise further before falling, and the ratio does not identify a catalyst or a timetable. It therefore cannot establish that a crash is imminent, how deep a drawdown will be, or when a recovery might occur.
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It is not a direct forecast of earnings growth
Campbell and Shiller examined aggregate annual U.S. data from 1871 to 2000 and quarterly data from 12 countries since 1970. They concluded that valuation ratios did poorly at forecasting future dividend, earnings, or productivity growth and were more useful for forecasting future stock-price changes. A high CAPE should not be read as a direct prediction that earnings growth will be weak.
It does not specify an investor’s return
A valuation ratio cannot promise a particular annual return. The outcome depends on what happens to income, earnings, and valuation over the investor’s holding period, as well as the starting and ending dates. Even a sound long-run relationship leaves substantial uncertainty about the path between those dates.
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Why long-horizon predictability claims need care
Statistical tests of valuation-based return predictability are not straightforward. Campbell and Yogo explain that conventional tests can be invalid when valuation predictors are persistent; their adjusted approach finds evidence of predictability. Boudoukh, Richardson, and Whitelaw, in turn, critique the apparent strength of long-horizon results, noting that overlapping returns and persistent predictors make estimates across different horizons highly correlated.
These methodological issues do not make valuation irrelevant. They do mean that a historical statistical relationship should not be mistaken for a precise forecast, a guaranteed premium, or evidence that a timing strategy will work for an individual investor.
How to use valuation in a decision
- Use it to set expectations, not dates. A high starting valuation can be a reason for caution about long-term average returns, but not a signal that says when to sell or buy.
- Keep the measure’s definition in view. Check the earnings window, inflation adjustment, and treatment of changing index membership before comparing CAPE figures.
- Distinguish price from earnings. Historical findings about valuation ratios are more informative about future stock-price changes than about future earnings or dividend growth.
- Do not treat an index average as a company-by-company assessment. The S&P 500’s aggregate valuation does not describe every constituent’s valuation or outlook.
- Pair valuation with a plan that does not require perfect timing. A long-term investor’s allocation and rebalancing choices should not depend on knowing when a valuation repricing will happen.
The sources cited here do not establish a current CAPE reading or a numerical future-return forecast. Any such figure should be checked against a dated live data source, with its calculation method stated; it should not be inferred from the historical correlations above.
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