Is the stock market over priced?

Cape Fear or Cape of Good Hope?

I regularly get asked, “Is the stock market high, Chris? Is it overpriced? Will it crash soon?” And the truth is, there is not one person in the world that truly knows. However, one point of certainty is that successful investment in global stock markets is achievable with careful long-term planning.

The process behind delivering this success is comprehensive, one element of which I will outline here.

A Better Way to Value the Stock Market

When most people ask, “Is the stock market expensive?”, the answer they usually get involves the price-to-earnings (P/E) ratio, which, in its simplest terms, measures a company’s current share price relative to its earnings per share. Divide the market’s current price by its most recent earnings, and you have a rough sense of value.

The problem? Earnings are noisy. They swing wildly with economic cycles, recessions, and one-off events. A company — or an entire market — can look cheap on a single year’s earnings during a boom and terrifyingly expensive during a downturn. The standard P/E ratio tells you a lot about the moment, but very little about the long-term picture.

Enter the CAPE ratio.

What Is the CAPE Ratio?

CAPE stands for Cyclically Adjusted Price-to-Earnings. It was developed by Professor Robert Shiller of Yale University — a Nobel laureate in economics — and is often called the Shiller P/E in his honour.

The idea is simple but powerful. Instead of dividing the market price by a single year of earnings, CAPE uses the average of the last 10 years of earnings, adjusted for inflation. This smooths out the peaks and troughs of the business cycle and gives a far more stable, reliable picture of whether the market is cheap or expensive.

What Does History Tell Us?

This is where it gets interesting.

The long-run historical average CAPE for the US S&P 500, going back to 1871, sits around 17. Readings above 25 have historically been considered expensive. Readings above 35 have been rare — and when they’ve occurred, they’ve almost always been followed by poor returns over the subsequent decade.

The CAPE hit its all-time record of 44.2 in late 1999 — right before the dot-com crash that wiped out nearly 50% of the S&P 500 and delivered a “lost decade” for equity investors.

Before the 2008 financial crisis, it sat at around 27.5. Not extreme, but elevated — and returns in the years that followed reflected that.

Where Are We Today?

As of June 2026, the US S&P 500 CAPE ratio stands at approximately 39.9.

To put that in context:

• It is nearly 2.5 times the long-run historical average of 17
• It has been this high on only one other occasion in 155 years of data — the dot-com bubble of 1999–2000
• It sits well above the long-term average of 32 even using more recent (post-1990) data
• It has risen over 10% in the past year alone

This is not a cause for immediate panic. High valuations do not tell you when the market will correct — only that the market is currently priced for near perfection. The margin for error is thin.

Why Is It So High?

There are legitimate arguments for why today’s CAPE might overstate the risk:

The composition of the market has changed. The S&P 500 is now dominated by large technology companies — Microsoft, Apple, Nvidia, Amazon — with higher profit margins and faster growth than the industrial companies that historically made up the index. Some analysts argue a structurally higher CAPE of 25–30 may be the “new normal”.

Passive investing has changed flows. Trillions of pounds and dollars now flow automatically into index funds regardless of valuation, which may support prices at higher levels than before.

Interest rates matter. When bonds pay very little, investors accept higher equity valuations. As rates have moved higher, this argument has weakened — but it hasn’t disappeared entirely.

These are reasonable points. But they are also the same arguments made in 1999. High valuations have a habit of reasserting themselves eventually.

It is a long-term return indicator. Shiller’s research showed a strong inverse relationship between CAPE levels and returns over the subsequent 20 years. When you buy at a high CAPE, you should temper your long-term return expectations accordingly.

It works best for broad, long-term portfolio decisions — not for individual stock selection or short-term market calls.

It applies primarily to the US market. CAPE ratios vary significantly by country. Many European and emerging markets currently trade at far lower valuations, which is one reason genuine diversification remains so important.

What Does This Mean for You?

If you are a long-term investor — saving for retirement, building wealth over decades — the CAPE ratio is a useful reality check.

At current levels, the US market is not priced for average returns. That doesn’t mean you should abandon equities. It means:

• Expectations should be calibrated accordingly. Historical average returns from this starting valuation have been below long-run norms.
• Diversification matters more, not less. Markets outside the US — Europe, the UK, parts of Asia — offer meaningfully lower valuations and potentially better risk-adjusted returns over the long run.
• Income and quality — dividends, cash flow, strong balance sheets — become more attractive when the growth premium built into US valuations is high.
• Asset allocation should reflect your time horizon and risk tolerance, not just momentum or recent performance.

The CAPE ratio is one tool, not an oracle. But it is one of the most rigorously tested long-term valuation metrics we have. And right now, it is telling us clearly: the US stock market is not cheap.

That is something every informed investor should have on their radar, and just one of the many considerations I take into account as a financial adviser when looking after my clients.