Shiller P/E Ratio (CAPE Ratio) Practical Examples

In 1996, economist Robert Shiller introduced a novel approach to analyzing the stock market. He called it the Shiller P/E Ratio, or CAPE Ratio. This tool helps us determine if stocks are priced fairly by examining their earnings over the past 10 years, adjusted for inflation.

Unlike the regular P/E ratio, which only considers one year of earnings, the CAPE Ratio smooths out short-term ups and downs. This gives us a clearer picture of the market’s true value. For example, before the 2008 financial crisis, the CAPE Ratio signaled that stocks were overvalued. Those who paid attention to this warning were better prepared for the downturn.

Today, the CAPE Ratio remains a valuable tool for investors. It helps us make profitable decisions by giving a long-term view of market valuations. We’ll look into the CAPE Ratio, how to calculate it, and how it can guide our investment strategies.

What Is the Shiller P/E Ratio (CAPE Ratio)?

The Shiller P/E Ratio, also known as the Cyclically Adjusted Price-to-Earnings (CAPE) Ratio, is a valuation measure developed by economist Robert Shiller. This metric evaluates whether stock market valuations are inflated or discounted by analyzing current price levels relative to the 10-year average of earnings adjusted for inflation.

Shiller P/E Ratio Formula Explained

The formula for calculating the Shiller P/E Ratio is:

CAPE Ratio = Current Price / (Average of 10 Years of Inflation – Adjusted Earnings)

This approach smooths out short-term fluctuations and provides a more stable view of a company’s earning power over a full economic cycle.

Shiller P/E Ratio Formula Explained

The formula for calculating the Shiller P/E Ratio is:

CAPE Ratio = Current Price / (Average of 10 Years of Inflation – Adjusted Earnings)

This approach smooths out short-term fluctuations and provides a more stable view of a company’s earning power over a full economic cycle.

Interpreting the Shiller P/E Ratio

Historically, the average CAPE Ratio for the S&P 500 is around 17.24. 

• High CAPE (>30): May indicate an overvalued market.
• Low CAPE (<15): May suggest an undervalued market.

For instance, as of May 2025, the CAPE Ratio stands at 34.82, signaling a potentially overvalued market.

How Investors Use the Shiller P/E Ratio

• Investors use the CAPE Ratio to assess whether the overall market is overvalued or undervalued, aiding in making informed investment decisions.
• The CAPE Ratio focuses on long-term earnings and helps investors plan for retirement and other long-term financial goals.
• A high CAPE Ratio can serve as a warning sign, prompting investors to diversify or adjust their portfolios to mitigate potential risks.
• Investors may use the CAPE Ratio to decide when to increase or decrease exposure to equities, aiming to buy low and sell high over the long term.

Real-World Examples of CAPE Ratio in Action

Dot-Com Bubble (1999–2000)

The CAPE Ratio exceeded 44 before the dot-com crash, indicating a highly overvalued market.

Global Financial Crisis (2007–2009)

Before the 2008 crash, the CAPE Ratio was elevated, and it dropped significantly after the market downturn, highlighting its predictive value.

Post-COVID Rally (2020–2022)

Following the COVID-19 pandemic, the CAPE Ratio rose sharply, reflecting rapid market recovery and raising concerns about overvaluation.

Pros and Cons of Using the Shiller P/E Ratio

Advantages

• Long-Term Perspective: Provides a more stable view of earnings over time.
• Inflation Adjustment: Accounts for changes in purchasing power.
• Risk Assessment: Helps identify potential market bubbles.

Limitations

• Not a Timing Tool: Doesn’t predict short-term market movements.
• Historical Focus: Relies on past earnings, which may not reflect future performance.
• Market Changes: May not account for structural changes in the economy or market dynamics.

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