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What Is the CAPE Ratio?

By Lyle Daly – Updated Jan 1, 2025 at 12:39 PM EST

Key Points

CAPE ratio calculates long-term valuation by averaging 10 yrs of inflation-adjusted earnings.
High CAPE ratios suggest potential overvaluation and future poor returns, low CAPE indicates good buys.
Relying solely on the CAPE ratio for investment decisions is debated; it's one of many tools.

The CAPE ratio, short for cyclically-adjusted price-to-earnings ratio, is a valuation metric for stock prices and indexes. Invented by economist Robert J. Shiller, it’s also known as the Shiller P/E ratio. While high CAPE ratios are generally considered a predictor of poor future returns, there’s debate over how accurate this metric is. Here’s what you need to know about how the CAPE ratio works and if you should use it.

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However, the CAPE ratio has been higher than 25 and even 30 since then in the mid-2010s and early 2020s, and we haven't seen that kind of market crash. Investors who held off would have missed out on significant gains. While active investors may want to make the CAPE ratio one of the metrics they use, it’s less important if you’re planning to buy and hold for decades, since you’ll be able to ride out down markets.

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About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

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