CHAPEL HILL, N.C. (MarketWatch) — Stock market bulls face an inconvenient truth as they celebrate the stock market’s new all-time highs.

Inflation.

It turns out that, when you take inflation into account, the stock market is not at an all-time high. It’s not even close.

No wonder the bulls are in denial.

Consider the data, courtesy of data compiled by Yale University finance professor Robert Shiller. In inflation-adjusted terms, the S&P 500 SPX, -0.84% hit its all-time high in early 2000, at the top of the internet bubble. If we were to denominate that index’s level in today’s dollars, the S&P before the bubble burst would have been above 2,000 —24% higher than where it stands today.

To be sure, dividends soften this blow — but only partially. Even with dividends re-invested, the inflation-adjusted S&P 500 index today is below its early-2000 peak.

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I don’t know about you, but to me this inflation-adjusted perspective vindicates the arguments that were outlined in the book “Irrational Exuberance,” published in 2000 by Shiller and Harvard economist John Campbell. As you may recall, that book introduced a modified price/earnings ratio that was less immune to the cyclical variability that plagues the traditional ratio. This modified version, known as the cyclically adjusted p/e ratio, or CAPE, divides the S&P 500’s level by average inflation-adjusted earnings over the trailing 10 years.

Shiller and Campbell reported that the CAPE had an impressive track record in forecasting the stock market’s return over the subsequent 10 years. And that was scary indeed, since the CAPE in early 2000 was higher than at any other time in history.

And, sure enough, here we are more than 13 years later and the S&P 500, in inflation-adjusted terms, is still below where it stood when their book was published.

Where does the CAPE stand today?

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It currently is at 23.3, which is 41% higher than its historical average. While the CAPE’s current level is not as high as the 40+ readings that were registered at the top of the internet bubble, it does not bode well for the next ten years. On average over the last century, the S&P 500 has produced a 10-year inflation-adjusted return of close to zero whenever the CAPE has been above 20.

To be sure, note carefully that this is a 10-year forecast. Even if it turns out to be accurate, it doesn’t mean the market will decline in a straight line between now and 2023. It wouldn’t be inconsistent with this forecast for the market’s impressive recent rally to continue for a while longer, for example.

But if it were to continue, the odds would grow even more that equity returns over the next 10 years will be disappointing.

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