October DealsAmazon USOctober deal check: compare before you payAmazon US: current deals, useful picks and tech finds.Check DealsClean PCRecommendedOne scan can reveal what keeps slowing WindowsLook for cleanup and repair opportunities.Run ScanOctober DealsAmazon USDeal season is back - check today's better picksAmazon US: current deals, useful picks and tech finds.See Picks×
Skip to content
The Finance Base
The Money Desk · Blog
Re:

What High S&P 500 Valuations Can—and Can’t—Tell You About Future Returns

High starting valuations can inform long-term return expectations, but they are not a crash signal or a reliable tool for timing the market.
From TheFinanceBase Team4 min to read
Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

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.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

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.

Rank #2
Sale
The Psychology of Money: Timeless lessons on wealth, greed, and happiness
  • Ideal for Gifting
  • Ideal for a bookworm
  • Compact for travelling

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.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.
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.

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.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.
Best Value
Sale
I Will Teach You to Be Rich: No Guilt. No Excuses. Just a 6-Week Program That Works (Second Edition)
  • It can be a gift option
  • Comes with secure packaging
  • Helpful in various ways
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Support on Ko-Fi

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.

Quick Recap

SaleBestseller No. 1
SaleBestseller No. 2
The Psychology of Money: Timeless lessons on wealth, greed, and happiness
The Psychology of Money: Timeless lessons on wealth, greed, and happiness
Ideal for Gifting; Ideal for a bookworm; Compact for travelling
$10.99
SaleBestseller No. 5
I Will Teach You to Be Rich: No Guilt. No Excuses. Just a 6-Week Program That Works (Second Edition)
I Will Teach You to Be Rich: No Guilt. No Excuses. Just a 6-Week Program That Works (Second Edition)
It can be a gift option; Comes with secure packaging; Helpful in various ways
$9.15

Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

Leave a Reply

Your email address will not be published. Required fields are marked *

Free tools Windows power users keep installed

One-click scans. No signup required.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

More post from the Money Desk

  1. The Money DeskBlogTheFinanceBase09 OCT 267 minMortgage Escrow FAQs: Taxes, Insurance, Shortages, and Refunds
  2. The Money DeskBlogTheFinanceBase09 OCT 265 minHow Mortgage Escrow Accounts Work and What Homeowners Pay For
  3. The Money DeskBlogTheFinanceBase09 OCT 265 minHow to Read a Stock Chart, Volume and Market-Cap Data
Recommended PC Tool
Recommended PC Tool
Outdated Drivers Are Slowing You DownFree scan - exact matches
PC Slower Than It Used to Be?Free scan - under a minute

Two free Windows tools

One Free Minute Could Fix That PC

Before you go - each of these free tools takes about a minute and tackles what quietly slows a Windows PC down.

Special offer. View Outbyte info, uninstall instructions, EULA, and Privacy Policy.