Shiller PE Ratio (S&P 500 CAPE) – Is Stock Market Overvalued

Current Shiller P/E Ratio

31.66 (-12.25%)

The Shiller PE Ratio or CAPE – also known as cyclically adjusted price-to-earnings is a valuation indicator that helps investors & traders to understand whether the stocks market (S&P 500) is undervalued or overvalued. The ratio is equal to the current Price divided by the average inflation-adjusted earnings over the prior 10 years.

Check – S&P 500 PE Ratio

S&P 500 Shiller CAPE Ratio By Month (1945-2022)

According to historical data, the average Shiller P/E ratio was 14.48 between 1900 and 1980, while the average ratio has changed to 22.64 (1981–2020) over the next 40 years. The highest ever ratio is 43.77 which was measured in 2000 (after the market crash) and the lowest was 5.12 found in 1921.

Historical Shiller PE Ratio

Global CAPE Ratios by Country

The chart below lists the Shiller PE Ratios (CAPE) of the largest economies in the world, which can be taken as a comparison of their stock market values at present, as well as one of their possible future developments.

Top Countries CAPE

Data Source – Siblisresearch

However, taking a look at this indicator might be misleading since different nations follow different capital market development cycles. Therefore, it would make sense to compare a country’s current ratio to its historical average.

Understand the Shiller P/E Ratio

There is a Price to Earnings Ratio (one simple way) to calculate current market valuation from Current Market Price/EPS. But those who have a financial background know that CAPE gives you a little more accuracy than the P/E Ratio. The Shiller PE ratio uses inflation-adjusted 10-year earnings data to minimize the impact of short-term earnings volatility and make long-term comparisons possible.

Formula = Current Price / Average Inflation-Adjusted 10-Year EPS

For Example: The S&P 500 Index data on 2021

-> S&P 500 Price: $4,355.88

-> Inflation-adjusted EPS: $109.06

So the Shiller PE Ratio is = 39.94 ($4,355.88/$109.06)

How to Use Shiller PE Ratio?

The Shiller P/E ratio may help you identify overvalued or undervalued S&P 500 companies that other valuation methods may miss. Low ratios imply that the stock market is possibly undervalued. High ratios, on the other hand, are linked to expensive markets.

For example – the historical average CAPE is 14 to 16 in the last 100 years, which shows whenever the ratio is extremely high before the market is going to down.

But it’s not necessary, that market reacts to the Shiller ratio. As an investor, you must analyze the overall market situation & every detail to make the best investment decisions, rather than relying on any single or group of indicators.

Shiller PE Ratio Vs PE Ratio

The formula for calculating the Shiller PE Ratio is similar to that of the PE ratio, except it divides the market value by a ten-year trailing average of actual earnings instead of dividing by one year’s earnings.

However, it is considered a more reasonable long-term measure of stock market valuation than the standard PE ratio because it eliminates the fluctuation of the ratio caused by the variation of profit margins during business cycles.

Note: Blog post is only for education purpose – may not be constitute as a investment advice.

FAQ’s

Is Shiller PE Ratio good indicator to valuate the stock market?

Yes! It’s a great indicator to calculate the market valuation. However, investors should consider alternatives like the yield curve, interest rates, margin debt, and buffet indicator instead of depending on one indicator.

Which country has the highest CAPE ratio?

According to Dec 2021 data here is the top countries by cape ratio: US (37.47), India (34.77), Canada (26.36), Japan (25.52) Australia (19.93), China (18.11), UK (15.64), Hong Kong (11.61), and Russia (10.53).

What is the formula of Shiller PE Ratio?

The formula of Shiller P/E ratio is the current price of a stock divided by the average inflation-adjusted earnings per share over the past 10 years.

Is Shiller PE Ratio better than PE Ratio?

The Shiller price/earnings ratio is a valuation indicator that accounts for cyclical changes in profit margins; as a result, this measure is less volatile than traditional price/earnings ratios due to the variation of profit margins during business cycles.

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