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Shiller P/E

BECAUSE STANDARD price-earnings ratios can be misleading, some investors rely on cyclically adjusted price-earnings ratios, or CAPE, a measure developed by Yale University professor Robert Shiller and fellow economist John Y. Campbell. CAPE is often referred to as the Shiller P/E.

The Shiller P/E is based on an average of reported earnings for the past 10 years, with earnings from earlier years adjusted upward to reflect inflation. This averaging has the benefit of smoothing out earnings, which can fluctuate widely from year to year. You can find the latest reading here.

Since year-end 1989, the CAPE multiple has been significantly higher than it was in earlier decades, suggesting it may have moved into a permanently higher range. If that is indeed the case, there’s both good news and bad news. The good news is, we may not see a reversion back to the lower levels of the 1980s and earlier decades, which would put a big dent in share prices. The bad news is, with valuations so elevated, returns are likely to be modest because we probably won’t see valuations climb much higher. Those rising valuations have helped to contribute to the stock market’s impressive long-run return.

If you want to dig deeper into the data on U.S. market valuations, check out the Online Data tab on Robert Shiller’s home page.

Next: Earnings Yields

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