Overview
- The Shiller cyclically adjusted price‑to‑earnings ratio, which smooths earnings using a 10‑year inflation‑adjusted average, reached 40 in the S&P 500 in June 2026, a level seen only once before.
- Research cited by market managers shows that very high CAPE readings have tended to precede negative annualized returns over the following decade, which raises concern about long‑term expected returns from stocks.
- Mean reversion can occur by stock prices falling or by inflation‑adjusted earnings rising, and prices can drop much faster than earnings can recover, creating a short‑term risk for investors.
- Today's market differs from the late‑1990s in that S&P 500 earnings growth has been relatively strong and many investors have built cash cushions, actions investors and some advisers say could reduce the odds of an immediate, large crash.
- The rare return to 40 revives comparisons to prior peaks such as 1929 and the 1999 dot‑com era and serves as a signal for investors to be selective, keep liquidity, and focus on companies with durable earnings prospects.