Hence, the CAPE crossed 40 to stand at 40.13. The earnings number for the Shiller P/E, based on that 10-year “real” average, is just over $117 a share. In the past, what has followed when you buy stocks at this CAPE isn’t pretty.Īt 1 PM on Friday, November 5, the S&P 500 was hovering at 4703 if it closes at that level, the index would notch still another all-time record. Still, the CAPE just hit a number so towering and so unusual that investors should take note. It’s true that extra-slender rates make future earning worth a lot more, hiking valuations for already expensive tech champs further skyward. But though the reckoning came with a lag, the result was almost always a wipeout that reaffirmed the Shiller P/E’s predictive power. It’s important to consider, however, that we’ve witnessed other periods when the CAPE reached seemingly gravity-defying plateaus, and even stayed there for quite a while.

The CAPE just reached a level that’s scary The reason: The new era of Fed-engineered, super-low “real” interest rates justifies multiples far above their former norms. That phenomenon has led analysts, fund managers, and market strategists to argue that the CAPE has become irrelevant. In the past couple of years, the CAPE has stayed well above its historic average and hence is flashing red. CAPE adjusts for those distortions by enlisting as the “E” not current earnings but a 10-year average of profits, adjusted upward for inflation. That’s because when profits hit a trough so low they’re destined to rebound, multiples look artificially high, and when earnings reach unsustainable, bubble territory, P/Es appear deceivingly modest. Using the current P/E to gauge if stocks are rich or cheap can be misleading.

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