The Excess CAPE Yield

What is the Excess CAPE Yield?

The Excess CAPE Yield (ECY) is a valuation indicator developed by Robert Shiller and colleagues. It starts from the equity earnings yield — the inverse of the cyclically adjusted price-to-earnings ratio, which smooths corporate earnings over ten years to look through the booms and busts of any single year. From that earnings yield it subtracts the real 10-year US Treasury yield. What remains is how much extra investors are being paid to hold equities instead of bonds: the equity risk premium, expressed as one number. The methodology was introduced in Bunn and Shiller (2014) and refined in Jivraj and Shiller (2017).

It does not tell you when. It tells you what you are being paid to take the risk.

Why it matters

The ECY rises when equities are cheap relative to bonds and falls when they are expensive relative to bonds. Its usefulness is empirical, not folklore: Bunn and Shiller (2014) and Jivraj and Shiller (2017) documented an inverse relationship between the measure and the subsequent ten-year real return on US equities. When the ECY has been high, forward returns have historically been better; when compressed, weaker. The relationship is statistical, not deterministic — history is under no obligation to repeat. But it describes the starting point from which an investor is allocating, and starting points compound.

Why it is not a timing signal

This is the most common way the indicator is misused. The Excess CAPE Yield says nothing reliable about the next year. It is a decade-long lens, not a stopwatch. Using it to call the top of a market is reaching for the wrong tool. Its value is not in predicting the turn; it is in calibrating expectations — in framing how generously, or how meanly, the broad market is currently paying investors to take equity risk over the years ahead.

How B.U.Y. uses it

We treat the ECY as context, not command. It tells us where the broad US equity market sits relative to its own history, and how compressed the risk premium has become. We pair that market-level reading with a stricter discipline at the company level, where an EV/EBIT-based valuation test does work the index will not, applied only after a business has cleared our tests for profitability and capital efficiency. You can read the longer argument in the companion essay, what the Excess CAPE Yield is telling us, see the framework on our equity approach, and track the current reading on the live Excess CAPE Yield indicator.

The same logic runs through our Basic Strategy: when starting valuations are stretched and the compensation for risk is thin, the price paid at entry does more of the work on the return that can reasonably be expected, so valuation belongs at the start of the process rather than as an afterthought. That posture is not a forecast and not a reason to reposition on any single reading. It is a reminder that, over a full market cycle of five to seven years, where you begin shapes where you can end up — and that protecting the downside is what lets an investor act when others cannot. Our diversified approach was built with that asymmetry in mind: in 2022, for instance, a balanced 60/40 reference portfolio fell roughly 10% over the year while the Basic Strategy finished modestly higher. Past performance is not indicative of future results.

This page is education, written by Flavio Melis for professional and institutional investors within the meaning of Article 4 FinSA. It is not investment advice, an offer or solicitation, or a forecast of future returns. Past performance and prior valuation levels are not indicative of future results.