No, stock valuations like the Shiller CAPE — the S&P 500 price divided by 10-year inflation-adjusted average earnings — do not predict crashes. Five-year crash forecasts lose power because momentum and trend drive prices in the near term, while valuation shapes expected returns over much longer periods.
ETF.com explains this averaging smooths business-cycle noise and follows Graham and Dodd's multiyear-earnings idea, as detailed in an ETF.com guide. The Motley Fool reports readings since 1871 average about 17.8, with the current reading around 41 exceeded only by the 1999-2000 peak near 44.2. High readings lower future return odds without setting a crash date.
Table of Contents
- What CAPE was built to do
- Why crashes do not wait for high valuations
- Why 5-year crash timing breaks down
- What high valuations still signal
- What investors can do instead
What CAPE was built to do
Campbell and Shiller's 1988 research found the 10-year-averaged earnings-price ratio holds information about future returns. That made CAPE a long-horizon expected-return gauge, not a crash trigger.
Shiller himself cautions that CAPE gives only a rough, very-long-term pricing guide. It does not predict tomorrow or the next few years. Jason Zweig notes it reached a record 44.2 by end-1999, yet timing remained uncertain.
Why crashes do not wait for high valuations
A Wealth of Common Sense tracked 15 S&P 500 bear markets since World War II, about one every five years. A Wealth of Common Sense finds six began below the 17.5 average trailing P/E and seven below 18.6 CAPE in its bear-market history.
Crashes often arrive without extreme valuations. Markets can fall when earnings or economic shocks hit, even from modest multiples.
Why 5-year crash timing breaks down
A Wealth of Common Sense argues momentum and trend beat valuation and fundamentals over the short to intermediate term. Price can keep rising after valuations turn high.
It can also keep falling after valuations turn low. Valuations therefore time crashes poorly. Five-year crash forecasts lose power even when the long-run return link holds.
What high valuations still signal
Vanguard finds high starting valuations drag down long-term returns, as outlined in its 2025 market outlook. Rich multiples do not ensure a near-term fall. They tilt the odds toward thinner gains ahead.
The Motley Fool reports CAPE near 41 sits far above its 17.8 long-run average since 1871. Only the 1999-2000 peak near 44.2 was higher. Vanguard notes U.S. equities can still defy valuation gravity without an earnings or economic shock.
What investors can do instead
Vanguard suggests long-term investors and retirees reset expectations and diversify rather than exit. Selling fully on valuation alone trades market risk for shortfall risk. Use a high valuation as a planning input, not an exit trigger.
Focus on actions that survive either a rally or a drop. Keep a mix you can hold through a bear market. Revisit savings and spending plans if expected gains shrink.
- Treat high CAPE as a lower-return warning, not a sell signal.
- Spread risk across assets rather than exiting stocks.
- Plan withdrawals for slower growth.
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.