The Shiller CAPE Ratio What it Means — and Why it's Flashing Red in 2026

As of the market close on July 27, 2026, the Shiller CAPE ratio for the S&P 500 sits at 40.5. To put that number in perspective: over roughly 150 years of data, the measure has been higher only once — at the very top of the dot-com bubble in late 1999, when it touched 44.2. Today’s reading is the second-highest in recorded history, and it is roughly 2.3 times the long-run average of about 17. If you have the feeling that stocks are getting expensive, this is the number that tells you why.

What the CAPE ratio actually measures

CAPE stands for Cyclically Adjusted Price-to-Earnings ratio. It is also called the Shiller P/E or the P/E 10, after the Yale economist Robert Shiller, who popularized it (with John Campbell) in the late 1980s and later won a Nobel Prize for related work on asset prices. At its core it answers the same question as an ordinary price-to-earnings ratio: how much are investors paying for each dollar of corporate earnings? A high number means stocks are expensive relative to profits; a low number means they are cheap.

The twist is in the word cyclically adjusted. A standard P/E divides today’s price by the last twelve months of earnings. The problem is that earnings are wildly cyclical — they collapse in recessions and balloon in booms — which makes the ordinary P/E lurch around for reasons that have nothing to do with valuation. Shiller’s fix was to smooth earnings over a full business cycle.

The formula

In plain terms: take the current price of the index, then divide it not by a single year’s profits but by the average annual earnings over the past ten years, with every figure adjusted for inflation. Averaging a decade of profits irons out the boom-and-bust distortions, and the inflation adjustment keeps old earnings comparable to new ones. What’s left is a cleaner read on whether the market is dear or cheap relative to its long-run earning power.

Reading the gauge

Because it is smoothed, the CAPE ratio is best understood against its own history rather than in absolute terms. The long-run mean is about 17.4 and the median about 16.1. At the depths of despair — December 1920, in the aftermath of World War I — it fell as low as 4.8. At the height of euphoria in December 1999 it reached its all-time record of 44.2. Everything in between is a spectrum from cheap to expensive, and today’s 40.5 sits at the very expensive end of that range.

Why this number matters: the historical record

The reason analysts pay attention to CAPE — and the reason it tends to resurface in headlines whenever markets get frothy — is that elevated readings have preceded most of the great market tops. The table below lines up the major U.S. peaks of the last century with their Shiller CAPE readings and the declines that followed.

CAPE figures are approximate peak readings and vary modestly by the exact month chosen. Declines are peak-to-trough; sources are listed at the end of the article.

A clear pattern emerges. Over the past 150 years, whenever the Shiller CAPE has pushed decisively above 30, it has eventually been followed by a major, often multi-year, correction. That threshold is worth sitting with, because today’s reading of 40.5 is not merely above it — it is one of only two occasions the measure has ever reached the 40s at all.

The catch: expensive is not the same as “about to crash”

Here is where honesty matters. CAPE is a good gauge of how expensive the market is, but a notoriously poor gauge of when that expense will be punished. It tells you the weather, not the hour of the storm. Two caveats deserve real weight before anyone treats 40.5 as a sell signal:

• The timing flaw. During the dot-com era the market flashed extreme CAPE readings for nearly four years before it finally broke in 2000. An investor who sold in 1996 because valuations looked stretched would have missed one of the great bull runs in history. “Expensive” can stay expensive — and get more so — for a very long time.
• Valuations predict returns, not crashes. What CAPE reliably forecasts is not the next twelve months but the next ten years. High starting valuations have historically been associated with lower average annual returns over the following decade — a headwind, not a trapdoor. It shapes long-run expectations more than short-run trades.
• The post-crash mirage of ordinary P/E. This is exactly why Shiller’s smoothing exists. In 2009, as recession gutted corporate profits, the S&P 500’s ordinary trailing P/E spiked above 100 — not because stocks were dear, but because the “E” briefly vanished. A single-year P/E can be actively misleading at precisely the moments valuation matters most; CAPE’s ten-year average is designed to see through that.

The piece CAPE can’t supply: the yield curve

If CAPE’s blind spot is timing, the natural question is whether anything fills it. The single best-known candidate is the yield curve — specifically the gap between the 10-year and 2-year Treasury yields. When long-term rates sit above short-term ones the curve is “normal”; when short rates rise above long ones it “inverts,” and an inverted curve has preceded almost every U.S. recession of the past half-century. It is one of the few indicators with a genuine track record on when, which is exactly what valuation lacks.

As of mid-July 2026 the 10-year minus 2-year spread stands at about +0.37% — positively sloped and steepening. On its face that looks reassuring. But the fuller history complicates the picture, because the curve was inverted from July 2022 all the way to September 2024, and has only recently normalized. And here is the counterintuitive part that catches many observers: recessions have historically tended to begin not while the curve is inverted, but after it re-steepens back to positive. The curve inverts when markets anticipate rate cuts; by the time it is climbing again, those cuts are usually arriving because the economy is weakening. Read that way, a curve that inverted for two years and un-inverted in late 2024 is not an all-clear so much as a later stage of the same cycle.

Stack the two signals together and the article’s thesis sharpens: valuations are at a near-record extreme and the most reliable recession-timing indicator has just completed the invert-then-steepen sequence that has front-run past downturns. That is a more complete risk picture than CAPE alone — and it speaks directly to the July 29 sell-off, which was led by rising long-term yields. Two honest caveats belong here too: the yield curve has produced false alarms before (the mid-1960s being the classic case), and stacking two bearish indicators can tempt you into a more confident crash call than either one justifies on its own. The signal is “expensive and late-cycle,” not “here is the date.”

The case for skepticism about the number itself

It is also fair to ask whether a CAPE of 40 today means the same thing a CAPE of 40 meant in 1929 or 1999. Several structural arguments suggest today’s “normal” may genuinely be higher than the historical mean:

• Accounting changes (notably the treatment of write-downs since the 1990s) have arguably depressed reported earnings relative to earlier eras, mechanically lifting the ratio.
• Interest rates and inflation spent much of the past two decades far below their twentieth-century norms, and lower discount rates justify higher earnings multiples.
• The composition of the index has shifted toward asset-light, high-margin technology and platform businesses that command higher multiples than the industrial economy Shiller’s early data captured.

None of this makes the number meaningless. But it argues for humility: a CAPE of 40 is unambiguously a high valuation, yet reasonable people disagree about how much of that reflects genuine risk versus a structurally higher baseline.

The bottom line

So — are P/E ratios getting too high? By the most respected long-horizon yardstick we have, the answer is that valuations are, by historical standards, extremely stretched. A Shiller CAPE of 40.5 has been exceeded exactly once in a century and a half, and it sits far above the levels that preceded 1929, 2007, and the 2022 bear market. That is a real and legitimate reason for caution.

What it is not is a countdown clock — and that holds even after a day like July 29. A single 1,100-point drop is what a fragile, expensive market looks like when it meets bad news; it is not, by itself, evidence that a correction has arrived, and the same CAPE has spent years at elevated levels without one. The yield curve adds a genuine timing dimension the valuation number can’t, and right now it too counsels late-cycle caution — but even two signals pointing the same way describe a tilted deck, not a dealt hand. The sensible reading is the one Shiller himself tends to offer: high valuations are a reason to temper expectations for the coming decade’s returns and to think carefully about risk and diversification — not a command to abandon the market on any particular Wednesday. The measure tells you the deck is tilted; it does not tell you when the cards will fall.