Valuations at the Edge: What Record CAPE Levels Signal for the Next Decade
The Shiller CAPE ratio has climbed back toward levels rarely seen in more than a century of market history, prompting renewed debate about what such extreme valuations imply for the decade ahead. With the CAPE now hovering near 39—essentially tied with readings last observed during the late-1990s tech bubble—investors are once again confronting a market landscape where long-term return expectations become meaningfully compressed.
The Shiller CAPE, or cyclically adjusted price-to-earnings ratio, measures the price of the S&P 500 relative to ten years of inflation-adjusted earnings. By smoothing out business-cycle fluctuations, it offers a clearer sense of the market’s underlying earnings power and is widely used as a long-run valuation anchor. Unlike a standard P/E, which can be distorted by unusual cyclical swings in profitability, the CAPE focuses on structural earnings and tends to provide a more reliable signal of long-term valuation risk.
Today’s CAPE sits at an extreme level when viewed through more than 120 years of historical data, and it is not the only valuation metric flashing red. The Buffett indicator—US total market capitalization relative to GDP—is also hovering near record territory, rivaling the peaks of 2000 and standing well above levels reached in 2007. Together, these measures suggest that the market is priced for exceptionally strong future earnings and economic performance. Several forces have supported these elevated valuations: a powerful wave of optimism around AI-driven productivity gains, the dominance of mega-cap technology firms with extraordinarily high margins, and fiscal as well as monetary policies that continue to provide support. Strength in household and corporate balance sheets has further reduced perceived recession risk, while global capital flows continue to favour the United States over other major markets. These macro forces have combined to push valuation multiples to levels rarely sustained in prior cycles.
History shows, however, that starting valuations matter greatly for long-term returns. The relationship between the CAPE and subsequent ten-year S&P 500 performance is strongly negative: high CAPE readings have consistently been followed by below-average—and at times negligible—decade-ahead returns. Regression work, including analysis from Apollo, suggests that today’s valuation levels correspond to expected annualized returns in the low single digits, far beneath the market’s long-term trend. While the CAPE cannot predict short-term market direction, it remains one of the most reliable indicators of long-run equity performance, underscoring the challenges investors may face in the coming decade.
Source: Apollo Academy, LSEG Workspace, Ventum Financial
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