What the Shiller P/E (CAPE) Can and Can’t Tell You

What It Covers

Steven Morris and Andrew Sather respond to a listener concerned about the Shiller CAPE ratio sitting near 40 — historically double its long-term average of 15–17 — and whether that justifies moving money into CDs or T-bills yielding 4–5% instead of stocks.

Key Questions Answered

• •CAPE Construction Bias: The CAPE ratio is heavily distorted by S&P 500 concentration at the top. Companies like NVIDIA (~$5T market cap), Apple, and Alphabet each carry PEs of 30–344, pulling the aggregate ratio higher while hundreds of smaller, cheaper index constituents go underrepresented. Evaluating individual stock valuations separately from the index-level CAPE produces a more accurate picture.
• •Market Timing Failure Rate: No consistently successful market timer using CAPE as an entry/exit signal has been identified. Value investors who exited in 2016 citing expensive valuations missed a decade of gains. The practical cost of waiting for a "cheap enough" market is permanent underinvestment, which historically produces worse outcomes than staying fully invested through valuation cycles.
• •Lump-Sum Psychology Override: When deploying a large sum for the first time, psychological comfort outweighs mathematical optimality. Breaking a large investment into scheduled tranches over several months reduces reactive selling during early drawdowns. Investors who check portfolios daily under stress are statistically more likely to sell at losses, making behavioral readiness a prerequisite before committing capital.
• •CAPE as Thermometer, Not Calendar: A CAPE of 40 signals elevated valuations but cannot predict when or how severely prices revert. The ratio's long-term average sits near 17, implying a theoretical 50%-plus correction to reach that level, but timing that reversion is impossible. Use CAPE to calibrate return expectations downward, not as a trigger to exit or pause systematic investing.
• •Stock Picker's Divergence Opportunity: When large-cap AI-adjacent stocks inflate the index CAPE, smaller and mid-cap businesses outside that trade often remain reasonably priced. Screening for high-quality businesses with low PEs outside the top 20 S&P holdings — sectors not correlated with AI infrastructure spending — can generate strong risk-adjusted returns even while the headline index appears expensive.