At almost 26, the level of Shiller’s 10-year cyclically-adjusted price/earnings ratio (CAPE) is currently more than 65% above its average since 1881. But the CAPE is inflated because reported earnings collapsed during the last recession due to tough new accounting standards. When these are substituted for operating earnings since the latter’s introduction in the late 1980s, and an adjustment is made for changes to firms’ payout policy, the degree of overvaluation reduces to 30% or so. What’s more, various factors – such as lower and more stable inflation – may have raised the CAPE’s equilibrium level.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services