Valuations are more favorable, but the Our median fair-value estimate sits at 23.7 times opportunity set is still limited the trailing 10-year average of real earnings. High inflation and rising real interest rates have Higher (lower) inflation and a more (less) caused Robert Shiller’s cyclically adjusted price/ aggressive Fed could cause our fair value to settle earnings (CAPE) ratio for the Standard & Poor’s lower (higher). Our analysis indicates that much 500 Index and our estimate of fair value to larger, more persistent shifts in the inflation and decline. Figure II-10 shows our model estimate interest rate environments are needed to move and suggests that although equity valuations valuations meaningfully beyond the standard have improved, they are still overvalued. error of our fair-value estimate. FIGURE II-10 U.S. equity valuations are more attractive than they were a year ago  Dot-com bubble o d i e t at s r u j s Fair-value d g a n i range lyrn ala CAP c e li/ c e c y i C r p          Notes: The U.S. fair-value cyclically adjusted price/earnings ratio (CAPE) is based on a statistical model that corrects CAPE measures for the level of inflation and interest rates. The statistical model specification is a three-variable vector error correction model including equity-earnings yields, 10-year trailing inflation, and 10-year U.S. Treasury yields estimated from January 1940 to September 30, 2022. Details were published in Davis (2017). A declining fair-value CAPE suggests that higher equity-risk premium (ERP) compensation is required, whereas a rising fair-value CAPE suggests that the ERP is compressing. Sources: Vanguard calculations, based on data from Robert Shiller’s website, at aida.wss.yale.edu/~shiller/data.htm, the U.S. Bureau of Labor Statistics, the Federal Reserve Board, Refinitiv, FTSE Russell, FactSet, Barclays Live, and Global Financial Data, as of September 30, 2022. 47