What Is the Shiller P/E Ratio? A Plain-English Guide

What Is the Shiller P/E Ratio?

The Shiller P/E — also called CAPE (Cyclically Adjusted Price-to-Earnings) — was developed by Nobel Prize-winning economist Robert Shiller of Yale University. It measures the price of the S&P 500 divided by the average inflation-adjusted earnings of the past 10 years.

The key insight is that one year of earnings is too noisy to be a reliable valuation anchor. A single year can be distorted by recessions, booms, one-off write-downs, or accounting changes. By averaging 10 years of earnings and adjusting for inflation, the CAPE gives a much more stable picture of underlying earning power — and therefore of whether the market is cheap or expensive relative to history.

Why 10 Years?

Ten years captures at least one full business cycle — typically including both a recession and a recovery. This means the earnings denominator reflects normalised profitability rather than peak or trough earnings. An investor buying at the peak of a boom would see a low P/E using single-year earnings (because boom earnings are high), but a high CAPE (because the 10-year average is more conservative). This is exactly the point.

Historical CAPE Levels and What They Mean

The long-run average CAPE for the S&P 500 is approximately 17. The historical record shows that buying when CAPE is below 15 has led to strong 10-year returns in the vast majority of cases. Buying when CAPE exceeds 30 has historically produced poor 10-year returns — though timing the exact peak is notoriously difficult.

The Strongest Use Case: Long-Term Return Expectations

The CAPE is not a short-term timing tool — it cannot tell you whether the market will be up or down next month or next year. What it does reliably predict is the range of likely 10-year returns from a given starting valuation.

Research by Shiller and others shows a strong negative correlation between the CAPE at the time of investment and subsequent 10-year returns. Buying at low CAPEs has historically produced high long-term returns. Buying at high CAPEs has historically produced low or negative real returns over the following decade.

The Main Criticism: "This Time Is Different"

Critics of the CAPE argue that structural changes in the economy — higher profit margins due to globalisation and technology, lower interest rates, changes in accounting standards — mean the historical average is no longer the right benchmark. This argument has some merit, but it's worth noting that "this time is different" has historically been said at every market peak, and has historically been wrong.

A more balanced view: the CAPE is most useful as a signal that expected future returns are lower (at high readings) or higher (at low readings) than average — not as a precise market timing tool.

CAPE for Other Markets

While CAPE is most commonly discussed for the US S&P 500, it can be calculated for any market. European markets, including Norwegian equities, have historically traded at lower CAPEs than the US — partly reflecting sectoral composition (more cyclicals, fewer tech companies) and partly reflecting different risk premiums. This makes cross-market CAPE comparison a useful tool for identifying relatively cheap markets globally.