CAPE Ratio
The Cyclically Adjusted Price-to-Earnings ratio (also known as the Shiller P/E), developed by Nobel laureate Robert Shiller. It divides the current price of an index by its 10-year average of inflation-adjusted earnings per share to smooth out cyclical distortions.
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“There's something called the CAPE Index or the CAPE Ratio where you look at basically the average of, I think it's a 10-year stretch of the earnings that the company got compared to what they're being valued at, and that traditionally runs, I think the number is like 16x. We're now over 40.”
More on what Tom said about CAPE Ratio Hide
- Good for
- Assessing market valuation and bubble risk
“The CAPE ratio — that's the price of the market divided by 10 years of company earnings adjusted for inflation. It's meant to smooth out spikes. The long run average is about 17. And right now it's 41. That's the second highest in 145 years.”
More on what Scott said about CAPE Ratio Hide
- Good for
- Assessing whether the stock market is overvalued
- Likes
- Smooths out earnings spikes over 10 years for a more reliable valuation signal
- Compared with
- Long-run average of 17 vs. current reading of 41; highest reading was December 1999
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