Shiller CAPE Ratio: P/E Smoothed Over Ten Years

Key Takeaways

• The Shiller CAPE ratio divides real price by the trailing ten-year average of real earnings.
• Shiller publishes monthly CAPE data back to 1871 on his Yale online data page.
• CAPE has historically had a negative correlation with subsequent ten-year real equity returns.
• The level alone does not time markets and structural arguments suggest the long-run average has shifted.

What It Is

The Shiller CAPE ratio, also called the cyclically adjusted price-earnings ratio or simply CAPE, is a price-to-earnings multiple computed using inflation-adjusted earnings averaged over a ten-year window. Robert Shiller of Yale, working with John Campbell, introduced the measure in the late 1980s and has maintained the underlying monthly data set back to 1871.

The numerator is the real (CPI-adjusted) level of the S&P 500. The denominator is the ten-year trailing average of real earnings per share for the index. Both series are scaled to current dollars so the resulting ratio is a single number that can be compared across more than a century of history.

The Intuition

A standard price-to-earnings ratio uses one year of earnings. Corporate earnings are cyclical and can swing 30% to 50% from peak to trough, which means a snapshot P/E can look misleadingly cheap at the top of a profit cycle and misleadingly expensive at the trough.

CAPE smooths over a full business cycle. By averaging ten years of earnings, it asks: what has this market actually delivered, on average, after inflation, recently? Pairing that smoothed earnings figure with current price reveals whether investors are paying a high or low premium for the cycle's worth of real profit.

The Campbell and Shiller research showed that high CAPE levels have historically been followed by lower real returns over the next ten years, while low CAPE levels have been followed by higher returns. The relationship is statistically meaningful at long horizons but provides little information about the next twelve months.

How It Works

The formula is:

CAPE = Real Price / Average Real Earnings (last 10 years)

Where real price and real earnings are both expressed in current-period dollars using the consumer price index to deflate historical observations:

Real Earnings (year t) = Nominal Earnings (year t) x (Current CPI / CPI in year t)

The averaging is a simple arithmetic mean over 120 months of real earnings. Shiller's online data set provides the monthly series and the resulting CAPE values, which is the canonical reference.

A related variant is excess CAPE yield, equal to the inverse of CAPE minus the real ten-year Treasury yield. This treats CAPE-based earnings yield as a real yield and subtracts the real risk-free rate to give a real equity risk premium proxy.

Worked Example

Suppose the S&P 500 trades at 5,000 today. Average real earnings of the index over the last ten years, scaled to today's dollars, are 160.

• CAPE = 5,000 / 160 = 31.25

If the current standard P/E using trailing twelve-month earnings is 22 (because earnings have been elevated for the past year), CAPE at 31 tells a different story. The smoothed multiple is rich relative to its long-run history, where the median CAPE over the post-war period has been roughly 17 to 19. A CAPE near 31 historically has been followed by below-average real returns over the next decade.

The same level was reached or exceeded in the late 1920s, the late 1990s, and the early 2020s. Each of those episodes was followed by sub-par long-run real returns, although the timing of any peak was different in every case.

Common Mistakes

1. Treating CAPE as a short-horizon timing signal. Research consistently finds that CAPE explains very little of one-year returns and much more of ten-year returns.
2. Ignoring structural change. Accounting standards, payout shifts toward buybacks, sector composition of the index, and the level of real interest rates have all changed since 1871. The mean CAPE may not be stationary.
3. Comparing across countries without adjustment. CAPE levels in different equity markets reflect different tax regimes, sector mixes, and inflation histories. The S&P 500 CAPE is not directly comparable to the FTSE 100 CAPE.
4. Using the level alone. Pair CAPE with real interest rates, the equity risk premium, and earnings quality. The excess CAPE yield framework is one way to control for the level of real rates.
5. Forgetting the survivorship of the index. The S&P 500 has reconstituted many times. Earnings history reflects the current composition more than the 1930 composition.

Frequently Asked Questions

What is the Shiller CAPE ratio in simple terms? The Shiller CAPE ratio is the price of the stock market divided by the average inflation-adjusted earnings of the past ten years. It smooths the swings in profits across one full business cycle.

How does the Shiller CAPE ratio affect investment decisions? Long-horizon investors use CAPE to set return expectations and to size equity exposure. Strategic allocations and risk-budgeting frameworks sometimes tilt away from equities when CAPE is far above its long-run mean.

What is a real-world example of the Shiller CAPE ratio? The S&P 500 CAPE reached roughly 32 in late 1929, peaked above 44 in late 1999, and was near 30 in early 2026. Each of those high readings was followed by below-average real returns over the next decade.

How can investors use the Shiller CAPE ratio effectively? Treat it as a long-horizon return expectation tool, not a market-timing trigger. Pair CAPE with real interest rates and use the excess CAPE yield to compare equity attractiveness against bonds.

How is the Shiller CAPE ratio different from a standard P/E ratio? The standard P/E uses trailing twelve-month or forward earnings; CAPE uses a ten-year inflation-adjusted average. CAPE is less responsive to short-term profit swings and more useful for long-horizon analysis.

Sources

1. Shiller, R.J. Online Data, Yale University. http://www.econ.yale.edu/~shiller/data.htm
2. Campbell, J.Y. and Shiller, R.J. (1988). Stock Prices, Earnings, and Expected Dividends. NBER Working Paper 2511. https://www.nber.org/papers/w2511
3. Damodaran, A. Equity Risk Premiums: Determinants, Estimation and Implications. NYU Stern. https://pages.stern.nyu.edu/~adamodar/pdfiles/papers/ERPfull.pdf
4. Federal Reserve Bank of Cleveland. Economic Commentary on Stock Market Valuation. https://www.clevelandfed.org/publications/economic-commentary

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.