MW Frothy, but not like 1999: This new valuation indicator has stocks beating inflation

By Mark Hulbert

Shiller CAPE ratio predicts a lost decade, but this superior model shows a path to positive real returns

A variation of the respected CAPE ratio says U.S. stocks are avoiding a dot-com-like bubble.

A new version of the cyclically adjusted P/E ratio suggests that the U.S. stock market isn't as overvalued as it otherwise appears.

Still, the original version of the CAPE ratio - the one that Yale University finance professor Robert Shiller made famous - is currently higher (more overvalued) than 97% of monthly readings over the last six decades. The new version, which actually has superior forecasting ability to the original, is higher than "just" 87% of such readings.

That may not seem like much, but market bulls who pay attention to valuation indicators have little to go on right now. Just look at the table at the bottom of this column, which lists the valuation indicators that have the best track records when predicting the stock market's real total return over the subsequent decade. A reading of 100% means the indicator is more bearish than it's ever been during the focused time period. Right now most indicators are maxed out at 100%. None is below 90%.

The new CAPE version differs from the original in how it treats companies that are delisted from the S&P 500 SPX. The original Shiller version is calculated by dividing the S&P 500 by its average inflation-adjusted earnings per share over the trailing 10 years, which means that the earnings of a company that drops out of the index will still be reflected in the ratio for up to a decade.

This new CAPE ratio is based on the trailing 10 years of earnings of only the companies currently in the S&P 500. It is the outcome of research conducted by Research Affiliates, the investment advisory firm, and reported in a study titled "Current Constituents CAPE," or CC-CAPE.

To appreciate the CC-CAPE's superior forecasting ability, consider a statistic known as r-squared - which reflects the degree to which one variable (in this case, the CAPE) predicts or explains another (in this case, the S&P 500's real total return over the subsequent decade). Since 1964, the earliest year for which Research Affiliates has data, the CC-CAPE has an r-squared of 36%, versus 26% for the original version.

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Mostly there isn't much difference between the two CAPE versions, as you can see in the chart above. But occasionally there is a huge difference, and the top of the 1990s internet bubble was one such occasion. When focusing on then-current S&P 500 constituents at the beginning of 2000, for example, the CC-CAPE was 68.8, versus 44.2 for the original version.

This difference in turn puts the stock market's current valuation in a new light. As the chart illustrates, the original CAPE version is only slightly lower than where it stood at the top of the internet bubble, while the CC-CAPE is significantly lower.

To appreciate the significance of this, consider two simple econometric models that were constructed out of the historical correlations between the S&P 500 on the one hand and either the CAPE or the CC-CAPE on the other. The implicit prediction of the CC-CAPE model is that the stock market will produce a total return of 1.0% annualized above inflation between now and 2036, versus the CAPE's prediction for a real total return of minus 0.3% annualized.

Beating inflation is better than losing purchasing power. The bottom line: The U.S. stock market is overvalued, but the CC-CAPE suggests that any comparison to the top of the internet bubble is exaggerated.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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-Mark Hulbert

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April 28, 2026 11:54 ET (15:54 GMT)

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