Glossary term
Cyclically Adjusted Price-to-Earnings (CAPE)
Cyclically adjusted price-to-earnings, or CAPE, compares a market's current price with the average of inflation-adjusted earnings over a long period, usually 10 years.
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What Is Cyclically Adjusted Price-to-Earnings?
Cyclically adjusted price-to-earnings, or CAPE, is a valuation ratio that compares a stock market's current price with the average of inflation-adjusted earnings over a long period, usually 10 years. It is also called the Shiller P/E or P/E10.
CAPE tries to smooth the earnings cycle. A normal one-year P/E ratio can look artificially high during recessions when earnings collapse, or artificially low near cyclical profit peaks. CAPE uses a longer real-earnings average so the denominator is less dependent on a single year.
Key Takeaways
- CAPE divides current market price by average real earnings over a long period, commonly 10 years.
- It is most often used for broad equity-market valuation, not short-term trading signals.
- Higher CAPE readings have historically been associated with lower long-term expected returns.
- The ratio is sensitive to accounting standards, profit margins, interest rates, index composition, and inflation adjustment.
- CAPE is a valuation lens, not a market-timing rule.
Formula
Real price and real earnings mean the values are adjusted for inflation. The 10-year window is the common version associated with Robert Shiller's market data, but analysts can adapt the idea to other horizons or markets if the data are reliable.
How Investors Use CAPE
CAPE is usually used to frame broad-market valuation. A high reading suggests investors are paying a large price for a smoothed earnings base. A low reading suggests the opposite. Because equity returns depend heavily on the starting price paid, CAPE can provide context for long-term return expectations.
The ratio is more useful over long horizons than over weeks or months. A market can stay expensive for years, and high CAPE alone does not identify the date of a bear market. Low CAPE can coexist with weak economic conditions, political stress, or structural risks that justify lower valuations.
CAPE Versus Regular P/E
Measure | Earnings denominator | Best use |
|---|---|---|
Trailing P/E | Recent reported earnings | Company or market snapshot. |
Forward P/E | Forecast earnings | Expectation-based valuation. |
CAPE | Long-term average real earnings | Cycle-smoothed market valuation. |
CAPE can be less distorted by a single recession or boom year, but it can also be slower to reflect genuine structural changes. If profit margins, tax rates, accounting rules, or sector weights have changed, the past 10 years of earnings may not perfectly represent future earning power.
Interpretation Cautions
CAPE is often strongest as a humility tool. It reminds investors that starting valuations shape long-term results, but it does not tell them whether to buy or sell tomorrow. Using CAPE as an all-or-nothing timing signal can lead to years of underexposure during expensive markets that continue rising.
Interest rates also matter. When bond yields are low, investors may be willing to pay more for equities. That does not make every high CAPE harmless, but it changes the opportunity-cost comparison. Global CAPE comparisons can also be tricky because accounting standards, sector mix, inflation history, and shareholder payout policy differ by country.
CAPE is also usually more appropriate for diversified indexes than for single companies. A company can undergo permanent changes in business mix, capital structure, accounting, or competitive position that make a decade of earnings less representative. At the index level, those company-specific shifts tend to be diversified, though not eliminated.
Investors sometimes convert CAPE into an earnings yield by taking its inverse. That can help compare smoothed equity earnings with bond yields, but it still does not turn CAPE into a guaranteed return forecast.
The Bottom Line
CAPE is a cycle-smoothed valuation ratio for equity markets. It can help investors judge whether broad stocks are priced richly or cheaply relative to long-run real earnings, but it works best as long-term context rather than as a precise trading signal.