Why you can’t trust the CAPE ratio

For MAVENS and MOGULS by The Accumulator on November 11, 2025

What if I told you that the CAPE ratio1 predicted just 25% of the variation in 10-year returns for the S&P 500. Would you be so worried about sky-high US valuations?

Right now the stock market’s best-known valuation gauge is at boiling point – it’s mercury having climbed into the 99th percentile of historical values.

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Mogul
1 Rhino November 11, 2025, 12:33 pm

Great article.

What’s the antonym phrase for ‘catching a falling knife’. I.e. Holding on to rising assets for as long as possible, as opposed to buying back in at depressed prices?

Typically I’m not very active, but have been thinking of these CAPE valuations as a threshold for rebalancing.
Maven
2 Prospector November 11, 2025, 1:28 pm

More food for thought, thanks @TA! I wonder how things look if you use a different averaging period (for CAPE)? The cyclically adjusted bit is meant to cover the economic cycle including boom and bust.

I suppose the last 10 years does cover a recession, in that we had Covid but it was far from typical as there was massive stimulus.

On the flip side by averaging I also wonder to what extent the historical earnings are being “left behind”. If there has been strong earnings growth relative to GDP then historic earnings may not be telling you much about future earnings prospects. So may also be worth looking at price earnings or price to forward earnings measures not just CAPE.

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Why you can’t trust the CAPE ratio

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