What is a 'Fair' CAPE Value?

In this video, we explore the history of the CAPE (Shiller PE) ratio, how it’s calculated, why its average has shifted higher since 1990, and why it’s a powerful predictor of long-term market returns—but not the short term. Discover how today’s CAPE compares to historical levels, long-term trend lines, and “fair value” estimates once you account for major structural changes like low interest rates, tech dominance, and accounting rules. Perfect for anyone wanting a deeper understanding of what valuations tell us about the decade ahead!

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Hello and welcome back to Reflections on Investing with the Cornell Capital Group.

Today we’re going to dive deep into one of the most important valuation metrics in investing—the CAPE ratio. You might have heard about this, and we’ve talked about it before in some previous reflections, but today we’re going to go a little further into its history, what it’s telling us now, and what the future might hold for stock returns.

What Is the CAPE?

The CAPE, or Cyclically Adjusted Price-to-Earnings ratio, was developed by professors John Campbell and Robert Shiller back in 1988.

It’s basically a P/E ratio for the S&P 500, but unlike a regular P/E ratio that just uses one year of earnings, the CAPE takes the average of the past 10 years of inflation-adjusted earnings to smooth out business cycles. It’s also called the Shiller PE, named after Robert Shiller, who popularized it during the dot-com bubble when he correctly predicted that the market was overvalued.

Here’s the way to think about it:

• A high CAPE ratio suggests that stock prices are elevated relative to long-term earnings, indicating the market may be overvalued and future returns could be lower.
• A low CAPE ratio points to stock prices being low relative to earnings, signaling undervaluation and the possibility for higher future returns.

But you need something to compare it to. Traditionally, by comparing the current CAPE level to its historical averages, investors can gauge whether equities are expensive or cheap, helping them inform their investment decisions.

The CAPE is actually a fairly good predictor of longer-term returns—we’re talking about 10 years or more.

But this is important: CAPE is not a reliable tool for short-term timing. Stock prices can, and they often do, remain above or below fair value for years before reverting closer to averages. In the short run, everything from economic surprises to geopolitics to investor sentiment can overwhelm fundamentals. Market moves over the next year or two are largely unpredictable, even if valuations seem extremely stretched or cheap.

So while CAPE can give us a valuable signal about what to expect over the next decade or so, it shouldn’t be used to decide when to jump in and out of the market over weeks or months. We look at it as a foundational tool for setting long-term expectations, not market timing.

The Long-Term CAPE Average

Since 1900, the CAPE has averaged around 17.74.

If the CAPE reverted to its full historical mean of 17.74, stock prices would need to fall about 53%. That’s a bit scary.

But should we be using the long-term average since 1900 to compare with—or have things changed?

A Structural Break Around 1990

A solid argument could be made that there have been some structural shifts—this is something we’ve written about extensively, and I’ll link our paper below.

You can notice that there appears to be a prominent break in the data around 1990:

• From 1900 to 1989, CAPE averaged just 14.
• Since 1990, it’s been above that pre-1989 mean virtually all the time, averaging about 27—nearly double the earlier period.

It definitely seems possible that post-1989 there could have been structural changes and legitimate reasons for the fair CAPE mean to be higher than the long-term historical average.

Three Approaches to Fair Value

Now we’re going to look at what a current fair value for the CAPE could be, from a few different angles.

1. Structural Fair Value Adjustments

There are several qualitative reasons the “normal” CAPE could now be higher than it used to be:

Lower Interest Rates — Lower interest rates mean lower discount rates, which increases the present value of future earnings. This adds roughly 3–5 points to our fair CAPE above the long-term average.

Tech Dominance & Intangibles — Tech and intangible-intensive companies, now the biggest in the world and in the U.S., trade at premium valuations. The proper capitalization of those intangibles in accounting would probably boost earnings and reduce CAPE by around 12%. This adds another 2–3 points.

Accounting Changes — Changes in 2001 ended goodwill amortization and boosted reported earnings. This adds about 4 points to our normal CAPE.

All in, these structural adjustments add about 10 points to the long-term average of 17.74, giving us a structural fair value of roughly 28.

2. Long-Term Trend Line

If we draw a trend line from 1900 to 2025—capturing 125 years of market history—that trend line shows CAPE should be around 25.8. This trend captures the gradual evolution of the economy, accounting for industrialization, the rise of modern finance, and all the structural changes we’ve discussed.

3. Modern Era Average (Post-1990)

From 1990 to 2025, the average CAPE is 26.67. The amount of data here is limited, so you might take it with a grain of salt.

The Convergence

Here’s where it gets interesting. We now have three independent methods:

1. Structural fair value adjustments → ~28
2. Long-term trend line → ~25.8
3. Modern era average → ~26.7

They all point to roughly the same number: the mid-to-upper 20s. Let’s call it 27.

This convergence gives us more confidence in the analysis.

What It Means for the Market

If the current CAPE of 37.8 reverted back to our new fair mean of 27, it would entail a 29% decline in the S&P 500.

That’s not nearly as dramatic as the 53% decline if it were going all the way back to the long-term historical average—but it still indicates an overvalued market and thus muted stock market returns over the next decade.

Again, just to reiterate: this is over the next decade. This is not saying anything about what will happen in a year, two, or even three.

For stocks to keep climbing in the long term from here, we’d need to see:

• Sustained earnings growth far above historical norms
• Further declines in interest rates
• New structural shifts that can justify even higher valuations
• A major productivity boom from AI or other technology breakthroughs that exceeds expectations

But expectations for AI are already quite high.

Bottom Line

The three independent measures—the trend line, the post-1989 average, and the structural adjustments—all define fair value CAPE in roughly the same range. With the CAPE now standing at 37.8, we are moderately overvalued and likely facing lower-than-average returns over the next decade.

This has been Reflections on Investing with the Cornell Capital Group. Thanks for joining us!