What the Excess CAPE Yield is telling us

A number that travels quietly

Most of what is written about markets is noise dressed as urgency — what happened today, what it might mean tomorrow. There is one measure that ignores all of it and has, historically, carried more information about the next decade of equity returns than almost any of the forecasts competing for your attention. It rarely makes a headline. It is the Excess CAPE Yield.

What it actually measures

Start with the earnings yield of the broad market, calculated on Robert Shiller’s cyclically-adjusted, ten-year-smoothed earnings — a deliberate attempt to look through the booms and busts of any single year. From that, subtract the real yield available on bonds. What remains is the Excess CAPE Yield: how much extra you are being paid to hold equities instead of bonds. It is the equity risk premium, expressed as a single, honest number.

Why it matters

This is not folklore. Bunn and Shiller (2014) and Jivraj and Shiller (2017) documented an inverse relationship between this measure and the subsequent ten-year real return on equities. When the Excess CAPE Yield has been high, forward returns have historically been better; when it has been compressed, weaker. The relationship is not deterministic, and history is under no obligation to repeat. But it describes the starting point from which you are investing — and starting points compound.

So is it a timing signal?

No — and this is where most people misuse it. The Excess CAPE Yield says nothing reliable about next year. It is a ten-year lens, not a stopwatch. Anyone using it to call the top of a market is reaching for the wrong tool entirely and will, sooner or later, be embarrassed by it. Its value is not in predicting the turn. Its value is in calibrating expectations.

What we do with it

We treat it as context, not command. It tells us how generously — or how meanly — the broad market is paying investors to take equity risk today. Against that backdrop, we then build to a stricter valuation discipline at the company level, where an EV/EBIT-based test does the work the index will not. You can see the framework on our equity approach, and the current reading on the live Excess CAPE Yield indicator.

Paid to take the risk

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

That is a humbler claim than a forecast, and a more useful one. Know what you are being paid, size your expectations to it, and let the next decade — not the next headline — be the judge.