#MARKETS & INVESTING
"The market is expensive, so it will fall." Valuation explains 28% of the spread in ten-year returns — and 4% at one year. The most expensive quintile still returns 5.2% the following year, and ends positive 69% of the time.
Published on September 3, 2026
The calculation runs on Robert J. Shiller's monthly series: S&P Composite price, dividends, inflation, and CAPE — price over the average real earnings of the past ten years. At ten years the correlation between log CAPE and the annualised real return that follows is −0.53, or 28% of the variance. Sorted into valuation quintiles, the cheapest windows return 10.9% a year over ten years, the most expensive 3.2%. At one year the correlation falls to −0.21: 4% of the variance. The most expensive quintile returns 5.2% on average the following year and ends positive 69% of the time, against 77% for the cheapest.
Does an expensive market signal a fall?
At ten years, valuation explains 28% of the spread in returns. At one year, 4% — and the most expensive market still rises nearly seven years in ten.
In other words: valuation tells you about the coming decade, almost nothing about the coming year.
Five caveats, because they matter
- Ten-year windows overlap month to month: the 1,605 observations are not independent, which inflates the appearance of statistical robustness.
- CAPE has trended upward since the 1990s. The most expensive quintile is therefore made up largely of recent periods, whose following ten years are, for the most recent, still incomplete.
- A correlation is not a trigger level: no CAPE reading gives the date of a fall.
- CAPE compares a price to average earnings over ten years. Changes in accounting standards and taxation across the century make comparison between eras imperfect.
- US data, on the best-performing market of the period. Nothing guarantees the same link holds elsewhere.
Why it still matters: the price paid weighs on what you earn over ten years; it says almost nothing about what happens next year.
For you
- When you are told the market is expensive, is the claim about the coming year or the coming decade?
- Would you stay out of the market for a signal that explains 4% of what happens over the next twelve months?
Source: reproducible Ze Finance calculation on Robert J. Shiller's monthly series, Online Data (Yale), September 2024 vintage — CAPE and real total return of the S&P Composite, January 1881 to September 2024 (1,605 rolling ten-year windows, 1,713 one-year windows).
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