Posts Tagged ‘CAPE’

CAPE of no hope

August 5, 2011

“Forward P/E ratios” are meaningless. Wild guesses, for the most part. Current P/E ratios (trailing 12 months) are overrated. Enter Professor Shiller of Yale University to clear out the fog of P/E ratios for the broad market. Shiller developed the idea of CAPE (Cyclically Adjusted P/E Ratio), which intuitively makes sense.

Because corporate profit margins are volatile, Shiller’s solution is to use a “normalized” P/E, which adjusts earnings to the average profit margin for the S&P over the last 10 year period.

Applying this brilliant valuation metric, the S&P is still about 30% overvalued. Read more about it here: