Shiller P/E Ratio: What It Is & How To Use It In 2025

At the time of the revision of this article in December 2025, the Shiller P/E Ratio stands at 39.90, marking the second-highest level in over 140 years of market history. This puts current valuations just below the infamous dot-com bubble peak of 44.19 from December 1999.

The Shiller P/E Ratio is a valuation metric that shows the multiple that the current price of a stock or index is trading over its inflation-adjusted, 10-year average earnings. Also commonly known as the Price Per Earnings ratio, Cyclically Adjusted Price to Earnings (CAPE) Ratio, CAPE, or P/E 10 Ratio.

The ratio was developed in the 1980s by Yale University professor and Nobel Prize Laureate Robert Shiller and is now widely considered among the most reliable long-term stock valuation indicators. However, it's important to understand that "long-term" means 10-20 years, not next month or next year.

Unlike regular P/E ratios that can swing wildly based on whether a company had a great quarter or a terrible one, the Shiller P/E looks at a full decade of earnings. This helps smooth out the natural ups and downs of business cycles, economic recessions, and temporary booms to give you a clearer picture of what stocks are really worth.

It is most commonly applied to broad stock market indices like the S&P 500, though it can also be calculated for individual sectors or even specific companies as an indicator of potential overvaluation or undervaluation compared to historical norms.

The formula to calculate the Shiller P/E Ratio is the current price of a stock or index, divided by the 10-year average earnings, adjusted for inflation.

Here's how it works step by step:

For example, if the S&P 500 is trading at $4,000 and the 10-year inflation-adjusted average earnings per share is $100, the Shiller P/E would be 40.

In this formula, inflation-adjusted earnings account for the fact that $1 of earnings in 2015 is worth more than $1 of earnings today (2025) due to inflation. This adjustment ensures we're comparing apples to apples across different time periods.

The 10-year average uses the arithmetic average (simple average) of the inflation-adjusted earnings, giving equal weight to each of the last 10 years. This approach intentionally smooths out short-term fluctuations to reveal longer-term valuation trends.

As mentioned previously, the current Shiller P/E Ratio for the S&P 500 is 39.90 as of December 2025. This represents the second-highest level in over 140 years of market data, exceeded only by the dot-com bubble peak of 44.19 in December 1999.

To put this in perspective:

• 100+ year historical average: 17.32
• Recent 20-year average: 27.3
• Current level: 39.90 (46% above the 20-year average, 130% above the long-term average)
• Previous month: 38.68
• One year ago: 34.51

What This Means for Future Returns

At current levels, the Shiller P/E implies expected annual returns of approximately 1.5% over the next decade - far below the historical stock market average of 7-10%. Major investment firms are echoing this pessimistic outlook:

• Goldman Sachs: 3% nominal returns over 10 years
• Research Affiliates: 0.7% real returns over 10 years
• Vanguard: 2.5-4.5% nominal returns over 10 years

However, it's crucial to understand that these are 10-year forecasts. The Shiller P/E has virtually zero ability to predict what will happen next month, next quarter, or even next year.

The first step to defining a good Shiller P/E ratio for investing is to compare it with relevant historical averages and understand what different levels typically mean for future returns.

Historical Context:

• Very Low (under 15): Typically signals excellent long-term buying opportunities
• Average (15-25): Suggests fair valuation with normal expected returns
• High (25-35): Indicates expensive valuations with below-average future returns likely
• Very High (35+): Historically associated with poor long-term returns and increased crash risk

However, there's an important debate happening right now about whether these historical benchmarks still apply.

The "New Normal" Debate

Some experts argue that structural changes in the economy justify higher valuations today:

• Lower interest rates reduce the discount rate for future earnings
• Higher profit margins due to technology and globalization
• Share buybacks have replaced dividends, changing how companies return cash to shareholders
• Passive investing creates constant buying pressure regardless of valuations

Sector Differences Matter

Not all parts of the market are equally expensive. As of late 2025:

• Technology: CAPE of 64.0 (extremely expensive)
• Communication Services: CAPE of 46.6 (very expensive)
• Financial Services: CAPE of 21.2 (closer to historical norms)
• Healthcare: CAPE of 31.1 (moderately expensive)

This means your investment strategy might focus on undervalued sectors rather than avoiding stocks entirely.

The Shiller P/E ratio is a powerful tool, but only when used correctly. Here's how smart investors actually use it:

For Long-Term Planning (10+ years):

• Use CAPE to set realistic return expectations
• Consider reducing equity allocation when CAPE is extremely high (35+)
• Increase allocation to international markets with lower CAPE ratios
• Focus on sectors with more reasonable valuations

What NOT to Use It For:

• Market timing (when to buy or sell next month)
• Predicting short-term market movements
• Making tactical trading decisions

Combine with Other Indicators:

The Shiller P/E works best alongside other metrics:

While the Shiller P/E ratio is valuable, it has important limitations that every investor should understand:

The short answer is: it depends on what you're trying to predict and over what timeframe.

Where CAPE Excels:

Where CAPE Fails:

The Academic Evidence: Multiple peer-reviewed studies confirm CAPE's reliability for long-term forecasting while acknowledging its limitations for shorter periods. The key is using it for what it's designed for: setting realistic long-term expectations, not timing your next trade.

Real-World Track Record: CAPE correctly warned about major bubbles but also gave false alarms. An investor who went to cash when CAPE hit 30 in early 2018 would have missed 70%+ gains through 2024. However, an investor who used CAPE to reduce equity allocation and diversify internationally would have been better positioned for various scenarios.

The Shiller P/E ratio at 39.90 is sending a clear message: expect below-average returns over the next decade. But that doesn't mean you should panic or abandon stocks entirely.

Smart investors in 2025 should:

• Use CAPE to set realistic return expectations (1-3% annually vs. historical 7-10%)
• Consider geographic diversification to markets with lower CAPE ratios
• Focus on sectors with more reasonable valuations (financials, healthcare vs. technology)
• Understand that high CAPE doesn't predict timing - markets can stay expensive for years
• Combine CAPE analysis with Excess CAPE Yield to account for interest rate environment

Remember: CAPE is a compass for long-term direction, not a GPS for daily navigation. Use it to plan your 10-20 year investment strategy, not your next trade.

The current reading suggests we're in the second-most expensive market in 140+ years of data. That's worth taking seriously for long-term planning, even if it doesn't tell us what happens tomorrow.

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