The measure was developed by the great Yale economist Robert Shiller, who calls it the “Excess CAPE Yield.” It’s an extension of Shiller’s legendary CAPE, or cyclically-adjusted price-earnings ratio, which measures whether stocks are under or overvalued by historical standards. To eliminate the peaks and valleys that can make equities appear cheap when earnings are inflated, or pricey when earnings crater but are bound to rebound, Shiller uses average profits over the past decade, adjusted for inflation, as the denominator. (The numerator is the S&P index.)

The bulls don’t talk much about the regular CAPE, because it has long been flashing red. Right now, it stands at 35.65. That figure exceeds the peaks of 33 in 1929 and 28 in 2007. So the traditional CAPE is signaling that a big correction is far more likely than a durable uptrend.

The Excess CAPE Yield, however, incorporates the enthusiasts’ favorite argument for why big cap stocks are by and large still a great buy. It factors in long bond interest rates, which until lately have hovered at incredibly low levels.

Those ultra-slender yields provide ballast for the position that as long as stocks look much less pricey than bonds, investor money is bound to keep pouring into equities. (Bonds’ prices move inversely to their yields, rising when yields fall.) In its more intellectual form, the argument holds that the plunge in Treasury yields starting in late 2018 substantially lowered the “discount rate” applied to future corporate profits. By basic math, a lower discount rate raises the “present value” of a given stream of profits, and greatly boosts stock prices. Seems to make perfect sense.

The rub is that the incredibly low rates essential to the bulls’ rationale have to stay low to prove them right. And that scenario has hardly ever happened. Now, we’re witnessing the trend that was likely from the start: a rebound in yields to much more normal levels, especially given the roaring economy the bulls see building. Indeed, the two views—that resurgent companies will be thirsting to expand in flush times ahead, and that despite strong demand for capital, rates can keep sitting at historic lows—seem to contradict one another.

On March 12, the day after the S&P hit its historic peak of 3,939, the 10-year Treasury (long bond) yield reached 1.62%. That’s a jump of 0.69 percentage points since the start of the year, and 1.11 points since August. As recently as Nov. 4, the yield stood at just 0.78%. The long bond hasn’t been paying this much since late January of 2020.

Here’s what made the yields until recently look so favorable for the go-go crowd: The long bond rates were sitting well below the course of inflation, meaning that “real yields” were steeply negative, a rarity in the past. This phenomenon strongly tilted Shiller’s Excess CAPE in favor of stocks, making it a favorite of the Wall Streeters who shun the standard CAPE. The Excess CAPE number is the difference between the S&P earnings yield, expressed as the the inverse of the CAPE––the adjusted cents in earnings companies are delivering for every dollar invested in their shares––minus the inflation-adjusted yield on the 10-year. Hence, it measures the margin by which what stocks are earning beats what super-safe bonds are paying.

At the close of September, the Excess CAPE stood at 4.33%. Sure, stocks were yielding just 3.25% at a Shiller P/E of almost 31. But the 10-year was yielding a minuscule 0.68%, way below the inflation rate of 1.76%. That difference put the “real” rate at a negative 1.08%. That 4.33% represented stocks’ edge over bonds, and it sure looked big.

It’s worth noting, however, that it only appeared so favorable because bonds at the time didn’t come close to keeping you even with your rent and grocery bills. Though stocks looked better than that, they were only promising a “real” return of 3.25%. Including future inflation of around 2%, that’s a paltry 5.35%, not at all the double-digit future forecast by most market strategists.

How does Wall Street’s prized benchmark look today? Inflation is now running at 1.61%. In a seismic shift, that’s a hair below the 10-year yield of 1.62%. Suddenly, real rates aren’t negative anymore, they’re flat. In the meantime, the S&P 500, despite some jittery days, has ignored the surge in the 10-year to reach fresh highs. That rise, of course, has lowered the Shiller earnings yield at the same time real rates rose by over a point. As of March 11, that earnings-yield number had declined from 3.25% in September to just 2.81% (the inverse of the CAPE of 35.6).

Since real rates went to zero, the Excess CAPE is precisely the same as the CAPE, at 2.81%. It’s no longer getting any help from negative real rates. Based on the Shiller numbers, the most likely outcome has stocks paying just 4.8% a year—that 2.81% earnings yield, plus 2% inflation. Here’s the haymaker: For the S&P to go back to its 4.3% edge over the long bond in September, the Shiller PE would need to drop from 35.6 to 23, and fall from 3,939 to 2,544.

Of course, it could be that the higher rates are heralding faster economic growth. In that case, higher earnings could offset the downward pull of rising rates. But analysts were already forecasting fantastic, probably unrealistic profits ahead to justify extremely high valuations. The cautious view is that real rates will normalize, profits won’t zoom past 2019 records as widely believed, and the S&P will correct.

The best time to buy stocks is when rates are unusually high, and PEs are unusually low. The current picture is the opposite. The economy will get back to normal. That would seem to be good news for the bulls. But it’s not. Stocks will go back to normal, too. And that will be a bummer.