Shiller PE Today: Is the U.S. Stock Market Overvalued?
Three independent valuation anchors. One uncomfortable answer.
Why a regular P/E ratio isn't enough
The standard price-to-earnings ratio (price ÷ trailing 12-month EPS) has a structural flaw: the denominator swings wildly across business cycles. At recession troughs, earnings collapse and PE looks artificially high. At cycle peaks, earnings are inflated and PE looks deceptively normal — which is exactly when the market is most expensive.
In 1981, Yale economist Robert Shiller (Nobel laureate, 2013) published a fix: divide price by the average inflation-adjusted earnings of the past ten years. Smoothing across a full business cycle removes most of the noise. The result is the cyclically-adjusted price-to-earnings ratio — CAPE, also called the Shiller PE.
Anchor #1 — Shiller CAPE
Across 154 years (1871–today), the long-run mean CAPE is ~17× and the median is ~16×. Three eras stand out:
- September 1929: 32×. Followed by a 86% drawdown.
- January 2000: 44×, the all-time high. Followed by a 49% drawdown and a flat decade.
- 2021–today: Persistently 33–40×. The longest stretch above 30× in history.
The empirical relationship that matters: CAPE is correlated about −0.7 with the next 10 years' real return. That's not a forecasting trick — it's a near-tautology. When you pay a lot for a dollar of earnings, your future yield is lower.
Today's CAPE puts forward 10-year real returns at a median of 2–3%, with a wide range. See the full series at the CAPE panel.
Anchor #2 — AIAE (Aggregate Investor Allocation to Equities)
This is a less famous but more powerful indicator, formalized by Philosophical Economics in 2013. It measures what share of all U.S. household financial assets sits in stocks (vs bonds, cash, and other claims).
The intuition: if everyone is already in, the marginal buyer is gone. If everyone is out, the marginal seller is gone.
AIAE has a correlation of −0.91 with subsequent 10-year stock returns — the strongest signal in the literature. Today it sits in the top 5% of its history, higher than the 1929, 1968, and 2000 peaks. See the AIAE panel.
Anchor #3 — The Buffett Indicator
Total U.S. stock market capitalization divided by U.S. GDP. Warren Buffett called this "probably the best single measure of where valuations stand at any given moment" in a 2001 Fortune essay.
- Long-run mean: ~80%
- 2000 peak: ~140%
- 2021 peak: ~200%
- Today: still above 180%
One legitimate criticism: as U.S. listed companies have grown more global (~40% of S&P 500 revenue is now non-U.S.), the numerator is increasingly worldwide while the denominator remains domestic. The "fair" mean has probably drifted higher over time.
So is the market overvalued?
Yes — by every traditional anchor, the U.S. stock market is in the top decile of historical valuation. What that means for an investor is a separate question.
The "this time is different" arguments
- Higher ROE / margins: Tech-heavy index has structurally higher returns on capital than the historical industrial mix.
- Lower interest rates: Lower discount rates justify higher multiples — though this argument weakened sharply in 2022–2024.
- Equity scarcity: Public listings have fallen from ~8,000 in 1996 to ~4,000 today. Stock itself is scarcer.
- Better earnings quality: Stripping out goodwill amortization, "real" EPS is higher than GAAP suggests, making CAPE artificially elevated.
Why the historical record doesn't support the rebuttal
Every previous "this time is different" — the Nifty Fifty in 1968, the dot-com era in 1999 — produced disappointing forward returns. Markets are humbling teachers of mean reversion.
What to actually do
Valuation anchors are not market-timing tools. CAPE doesn't snap back to 17× on any predictable schedule. Practical implications:
- Lower your forward return assumption. If your retirement plan assumes 8% real, plug in 4–5% instead.
- Don't lever. Leverage at extreme valuations is the fastest historical wealth-destroyer.
- Hold dry powder. Drawdowns reset valuations; cash matters most when stocks are cheapest.
- Diversify internationally. Most non-U.S. CAPEs sit in the 15–20× range. The math is more forgiving.
- Don't quit equities. Even at high valuations, multi-decade holders historically still beat bonds and cash.
Data sourced from /api/sp500/pe.json and /api/aiae.json. Refreshed daily. Free for research and citation.