Yes, high valuations predict lower future stock returns and a higher risk of corrections. CAPE-H, an updated cyclically adjusted price-earnings ratio, signals weaker excess returns ahead at 1, 3, and 5 years when valuations stretch.
The warning grows more reliable as the horizon lengthens. CAPE divides the S&P 500 price by 10 years of inflation-adjusted earnings to smooth cycles, according to CFA Institute in CFA Institute's CAPE explainer. Federal Reserve economist Dino Palazzo's May 2026 CAPE-H restores comparability by capitalizing R&D and stripping volatile special-item write-downs, according to Capital Spectator in Capital Spectator's summary of Palazzo's research.
Table of Contents
- Why traditional CAPE stopped working
- What a CAPE above 39 meant next year
- Why the 3- and 5-year record is stronger
- How to act when CAPE tops 30
Why traditional CAPE stopped working
Traditional CAPE lost power after the 1990s because it stopped predicting price gains. Capital Spectator's summary of Palazzo finds CAPE-H restores predictability for excess returns. Dividend growth stays unpredictable even with the fix.
Modern accounting drives much of the distortion. Expensing R&D understates earnings for innovative firms, while one-time write-downs create false cheapness or richness. Capitalizing R&D and removing special items makes past and present earnings comparable.
What a CAPE above 39 meant next year
At the bleakest starting point, months with CAPE above 39 averaged about minus 4 percent over the next year. The best case still gained about 16 percent, while the worst case lost about 28 percent, according to Motley Fool citing Shiller data in Motley Fool's review of Shiller data.
One year tells you little about timing. A 16 percent gain can follow the same signal as a 28 percent loss. For S&P 500 investors, that spread makes single-year bets dangerous.
Why the 3- and 5-year record is stronger
Over three years the extreme signal was uniformly negative. After those same CAPE-above-39 months, the S&P 500 never posted a positive three-year return. The average was about minus 30 percent, with losses from 10 to 43 percent.
Broader history shows the same slope. Novel Investor analysis of 1926-2015 starting valuations finds higher buckets produced lower average 1-, 3-, 5- and 10-year total returns. January 2026 research by Ma, Marshall, Nguyen and Visaltanachoti confirms lower next-decade returns, though weighting choices change accuracy.
How to act when CAPE tops 30
CFA Institute cautions that CAPE guides long-run returns but cannot time the market and can stay high for years. Financial Advisor Magazine reporting on the 2026 study draws a practical line in Financial Advisor Magazine's report on the 2026 study: trim 10-year expectations and manage risk above 30-40. Useful responses adjust exposure and plans, not all-or-nothing exits.
- Check your stock share against your age and need for cash.
- Cut the return rate in retirement math and save more if needed.
- Add to stocks on a schedule rather than pausing or going all in.
For the whole study explained, with every figure checked against the September 18, 2026 version of the paper, read The CAPE That Cried Wolf: What CAPE-H Says About Stock Valuations.