The CAPE Ratio: Valuations Across Full Market Cycles
Why Shiller's cyclically adjusted P/E outperforms standard valuation metrics for long-horizon forecasting.
The CAPE ratio (Cyclically Adjusted Price-to-Earnings), developed by Nobel laureate Robert Shiller, divides the current market price by the average of ten years of real (inflation-adjusted) earnings. By smoothing earnings over a full cycle, it eliminates the distortions caused by temporary earnings peaks or troughs. At approximately 35x in early 2026, the CAPE ratio is at its third-highest level in 150 years of data, surpassed only by the dot-com peak in 1999-2000.
Why ten years of earnings
Standard price-to-earnings ratios use trailing 12-month or forward 12-month earnings. These single-year earnings are highly volatile — corporate earnings can double or halve within a few years depending on the economic cycle — making the resulting P/E ratio an unreliable valuation gauge.
Shiller's insight was to average earnings over a full economic cycle (approximately 10 years), smoothing through both recession-depressed and boom-elevated earnings to arrive at a more stable measure of normalized earning power. The CAPE ratio answers: how much are investors paying for a dollar of long-run sustainable earnings, rather than a dollar of cyclically elevated or suppressed earnings?
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Not financial advice. Educational content only.