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The Shiller CAPE ratio (Cyclically-Adjusted Price-to-Earnings) divides the inflation-adjusted S&P 500 price by the 10-year average of inflation-adjusted earnings. Smoothing over a full business cycle strips out the distortion caused by short-term earnings booms and busts.

Why it matters: CAPE is the single most-cited long-term equity valuation metric. Historically, starting CAPE explains a meaningful chunk of the next 10-year real return — low CAPE readings precede strong decades, high readings precede disappointing ones. It doesn't predict next month, next quarter, or even next year, but it's useful for thinking about multi-year expected returns.

How to read it: Look at the all-time percentile, not the absolute number. The long-run median sits around 16-17. Readings above 30 have historically only occurred during the late-1920s, late-1990s dot-com, and the post-2017 era. Current CAPE at the 97th percentile of 143 years of history is a meaningful "this is historically expensive" signal — though it has stayed elevated for extended periods.

Caveats: CAPE is often criticized for comparing current earnings (GAAP) to earlier periods' earnings (which were computed differently). Accounting rule changes in the 1990s reduced reported earnings relative to older methods, which mechanically pushes modern CAPE higher. Some analysts argue "fair" CAPE should be 2-4 points higher than historical averages for this reason.