What is the Shiller CAPE ratio?
The cyclically-adjusted price-to-earnings ratio. Developed by Robert Shiller in the 1990s, it divides the current stock price by the 10-year inflation-adjusted average of earnings. Smooths business-cycle earnings volatility for long-horizon valuation.
The Shiller CAPE (also called PE10) replaces the denominator of a traditional P/E (trailing 12 months earnings) with a 10-year inflation-adjusted average. The smoothing dampens business-cycle earnings volatility: a company at peak-cycle earnings looks artificially cheap on trailing P/E and artificially expensive at trough-cycle. CAPE corrects both biases. The signal is most useful for the broad market: when the S&P 500 CAPE exceeds 30, forward 10-year real returns have historically been low; when below 15, they have been high.
Strengths and limitations
CAPE works best as a long-horizon (10-year) signal, not a market-timing tool. The S&P 500 CAPE has been elevated for most of the last 25 years; using it as a binary buy/sell trigger would have kept an investor out of one of the strongest equity bull markets in history.
For individual stocks, CAPE is noisier because the 10-year earnings history can include corporate-event distortions (mergers, divestitures, restructurings) that the smoothing cannot account for. invest-like does not use stock-level CAPE in the consensus rubrics; the valuation pillars use forward and trailing FCF yield, P/E, and EV/EBITDA instead.
Frequently asked questions
What is the Shiller CAPE ratio?
Current price divided by the 10-year inflation-adjusted average of earnings. Smooths business-cycle volatility for long-horizon valuation.
Does invest-like use CAPE on individual stocks?
No. Stock-level CAPE is too noisy due to corporate-event distortions in the 10-year earnings history. The valuation pillars use FCF yield, P/E, EV/EBITDA, and DCF-derived intrinsic value instead.
Does CAPE work for market timing?
Not as a binary signal. It's a long-horizon (10-year+) predictor of broad-market real returns, not a tactical timing tool. Using CAPE > 30 as a sell signal would have missed most of the post-2009 bull market.
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