The Shiller-PE S&P 500 CAPE ratio as of 07-2023

 

The Shiller-PE S&P 500 CAPE ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), is a valuation metric that measures the current price of the S&P 500 index relative to the average inflation-adjusted earnings of the index over the past 10 years.

The CAPE ratio was developed by Robert Shiller, a Nobel Prize-winning economist, as a way to smooth out the volatility of the price-to-earnings ratio (PE ratio) and provide a more accurate measure of long-term stock market valuations.

The CAPE ratio is calculated by dividing the current price of the S&P 500 by the average inflation-adjusted earnings of the index over the past 10 years. For example, if the current price of the S&P 500 is 3,000 and the average inflation-adjusted earnings of the index over the past 10 years is 100, then the CAPE ratio would be 30.

A high CAPE ratio indicates that the market is overvalued, while a low CAPE ratio indicates that the market is undervalued. The average CAPE ratio over the past 100 years is 16.7, so a CAPE ratio of 30 would be considered to be very high.

The CAPE ratio is a useful tool for investors to assess the overall health of the stock market and to make investment decisions. A high CAPE ratio can be a warning sign that the market is overvalued and that a correction or crash may be imminent. However, it is important to remember that the CAPE ratio is just one measure of market valuation and should not be used in isolation.

Here are some of the advantages of using the Shiller-PE S&P 500 CAPE ratio:

• It is a long-term valuation metric that smooths out the volatility of the PE ratio.
• It is based on inflation-adjusted earnings, which provides a more accurate measure of stock market valuations.
• It has been shown to be a reliable predictor of future stock market returns.

Here are some of the disadvantages of using the Shiller-PE S&P 500 CAPE ratio:

• It is a backward-looking measure, so it cannot predict future stock market returns with certainty.
• It can be difficult to interpret the CAPE ratio for markets that are not as mature as the US market.
• The CAPE ratio is not a perfect measure of market valuation, so it should be used in conjunction with other valuation metrics.

Overall, the Shiller-PE S&P 500 CAPE ratio is a valuable tool for investors to assess the overall health of the stock market and to make investment decisions. However, it is important to remember that the CAPE ratio is just one measure of market valuation and should not be used in isolation.