The CAPE that Cried Wolf
Dino Palazzo (Board of Governors of the Federal Reserve System)
May 2026
The Capital Spectator’s Takeaway
The paper reports that traditional CAPE ratio’s false warnings of market overvaluation since the 1990s are an accounting illusion caused by mandatory R&D expensing and volatile special-item write-downs. By stripping out these regulatory distortions, CAPE-H eliminates the apparent structural break and restores CAPE’s ability to accurately predict long-term price appreciation and excess stock market returns.