As of August 7th, the S&P 500 Shiller PE (CAPE) rose to 42.39, with a long-term average of 17.40. This is only lower than the historical peak of 44.19 during the dot-com bubble, and significantly higher than the 1929 peak of 32.56. Currently, it has entered the second time in history that its valuation has exceeded 40 times earnings, representing an extreme valuation range.
The warning significance of CAPE lies primarily in long-term returns, not in predicting when a decline will occur. The historical sample of valuations above 40 times earnings is almost entirely concentrated in the period of 1999-2000. Therefore, using one bubble cycle to infer inevitable losses over the next decade is based on an excessively small sample size.
The real signal is that the long-term valuation tolerance of US stocks is already very low: a high CAPE means that future returns depend more on continued better-than-expected corporate earnings, rather than continued valuation expansion. Profit margins and earnings growth driven by AI may allow high valuations to persist longer, but once earnings realization falls short of expectations or real interest rates continue to rise, high valuations will amplify the pressure for correction. CAPE indicates that the direction of "expected returns declining over the next decade" is valid, but it cannot be used to conclude that US stocks are about to peak or that real returns over the next decade will inevitably be negative.
