Stocks Seem Expensive. This Metric Tells You If They Really Are.

• The excess CAPE yield measures how attractive stocks are compared to bonds by examining the difference in their real yields.
• Historically, the higher the excess CAPE yield has been, the better the returns of stocks, relative to bonds, over the following decade (and vice versa).
• Today, the excess CAPE yield is 1.4% – which is low relative to its history. But it’s still positive, which suggests that stocks could outperform bonds over the next decade, assuming the historical trends continue.

As Ferris Bueller (nearly) said: “The market moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” It’s an iconic movie line and a good reminder to step back from the daily price swings and focus on what really matters to your portfolio: economic fundamentals and stock valuations. With that in mind, here’s a quick, no-nonsense guide to help you do just that.

What should you actually consider when judging valuations today?

When weighing up US stock valuations, it’s good to use a measure that captures more than just prices relative to earnings. To get a fuller picture, you’ll want to factor in some key economic variables like bond yields and inflation. After all, these have had a huge influence on the market in recent years and are likely to remain major drivers. That’s especially clear this year: the conflict in the Middle East has driven up energy prices, reignited inflation fears, pushed bond yields higher, and weighed on share prices.

Take, as another example, the US president’s desire to cut corporate taxes even further. Such a move could boost companies’ earnings, but it would also widen the government deficit and lead to higher bond yields. Those higher yields, in turn, could weigh on stock valuations.

As a final example, consider the series of tariffs imposed on things shipped into the US last year. Those import taxes could have a major impact on corporate earnings, depending on how much of the new underlying costs firms can pass along to customers. Either way, the levies could drive up inflation, which has its own implications for the economy and asset valuations. For example, higher inflation could lead the Federal Reserve to pause its interest rate cuts or even reverse them, since the sharpest weapon against an inflation flare-up is higher interest rates. Those steeper borrowing costs, in turn, would weigh on stock valuations.

So what’s the best valuation gauge to use here?

One that stands out to me is the excess cyclically adjusted price-to-earnings (CAPE) yield. It’s a mouthful, sure, but it’s also a handy tool.

This metric has two components: the CAPE itself and its conversion into an excess yield figure. The CAPE is essentially a price-to-earnings (P/E) ratio that’s been smoothed over a broader horizon to account for variations in the business cycle. It compares current stock prices to average earnings over the previous ten years, adjusted for inflation. This smoothing process makes the CAPE especially useful when analyzing stocks over long periods.

The excess CAPE yield is calculated by inverting the CAPE ratio (1 divided by CAPE) to determine the earnings yield for stocks, then subtracting the real (i.e. inflation-adjusted) 10-year Treasury yield.

Essentially, this metric measures the attractiveness of stocks, relative to bonds, by examining the difference in their real yields. The rationale is simple: stock valuations shouldn’t be viewed in isolation from bonds. Lower bond yields, after all, justify paying more for stocks.

What is the excess CAPE yield today, and what does it mean?

Nobel laureate Robert Shiller – the economist who developed the metric – publishes a monthly updated Excel file with the excess CAPE yield on his website. You can also view it here.

Historically, the higher the excess CAPE yield has been, the better the returns of stocks (again, relative to bonds) over the following decade. The reverse is also true, as you can see in the chart below.

Excess CAPE yield and subsequent ten-year annualized excess returns. Source: Robert Shiller.

And it makes sense: a high excess CAPE yield indicates that stocks are cheaper and more attractive than bonds, which positions them well for future outperformance. Interestingly, the two times when the excess CAPE yield went negative (meaning stocks were more expensive than bonds) happened just before the Great Crash of 1929 and the dotcom bust in the late 1990s – historically, the best two moments to get out of the stock market.

As of early May, the excess CAPE yield stood at 1.4%, which is low relative to its nearly 150-year history, sitting in the 23rd percentile. And that makes sense, considering the S&P 500’s CAPE is currently 40x – not far below the record 44x reached at the height of the dotcom bubble. Real bond yields, meanwhile, are slightly elevated compared to recent levels.

But, despite being low, the excess CAPE yield is still positive – which suggests that stocks offer better value today than bonds and could outperform over the next decade (if historical trends hold true).

Using Shiller’s dataset, I conducted a linear regression analysis to assess how one variable affects the other. And based on today’s excess CAPE yield of 1.4%, the model predicted that stocks will outperform bonds by an annualized 2.7% over the next ten years. That’s not huge, but it’s something. (Mind you, as with all models, you’ll want to take this with a big grain of salt.)

One drawback of the excess CAPE yield calculation, in my opinion, is its approach to calculating the real bond yield. It subtracts the actual annualized inflation rate over the past decade from the current 10-year Treasury yield. In other words, it relies on a backward-looking measure of inflation rather than a forward-looking, expected inflation rate. With that in mind, if we instead use a market-derived measure of real, inflation-adjusted bond yields, such as the return currently available on 10-year Treasury Inflation-Protected Securities (TIPS), the excess CAPE yield falls to a measly 0.5%. In that scenario, stocks don’t look that much more attractive.

So if you’re invested in a diversified portfolio made up of stocks and bonds, it might be wise to simply hold steady.

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Originally Posted May 27, 2026 – Stocks Seem Expensive. This Metric Tells You If They Really Are.