Valuation
CAPE ratio
Also called Shiller P/E or Cyclically adjusted P/E
Price divided by average inflation-adjusted earnings over ten years, to smooth out the business cycle.
How it works
Using a decade of earnings removes the distortion of a single exceptional or disastrous year, which makes it more useful for judging whole markets than a one-year P/E.
Historically, high CAPE readings have been associated with lower returns over the following decade — a relationship that is real on average and useless for timing.
Where it misleads people
CAPE has signalled expensive markets for long stretches during which markets kept rising. Accounting standards and index composition also change over decades, so comparisons to century-old readings are not like for like.
Related terms
- P/E ratioThe share price divided by earnings per share — roughly, how many years of current profit you are paying.
- Mean reversionThe tendency of extreme values — margins, multiples, returns — to drift back towards long-run averages.
- Equity risk premiumThe extra return investors expect from shares over risk-free government debt, for accepting the risk.
- Market timingTrying to buy before rises and sell before falls, rather than staying invested throughout.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.