Cyclically adjusted price-to-earnings ratio¶

The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10 ratio) is a stock valuation measure usually applied to the US S&P 500 equity market.

Version: v1 · 2026-09-28 · History
Domain-specific #: 8828
Domain group: Social Sciences
Origin domain: Economics & Finance
Subdomains: Equity Valuation, Financial Economics → Economics & Finance

Core Idea¶

Cyclically adjusted price-to-earnings ratio is treated here as the recurring cross-domain formal modeling identity summarized by this source-grounded definition: The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10 ratio) is a stock valuation measure usually applied to the US S&P 500 equity market. The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10 ratio) is a stock valuation measure usually applied to the US S&P 500 equity market.

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Ten-Year Price Check

Imagine you want to buy a lemonade stand. You look at how much money it made each year for the last ten years, find the average, and fix it for things getting more expensive over time. If the stand's price is really high compared with that average, you probably won't get as much money back in the years ahead.

Price vs. Ten-Year Earnings

The cyclically adjusted price-to-earnings ratio, also called CAPE, is a way to judge whether stocks are expensive or cheap. It divides a stock's price by its average earnings, the profits it made, over the last ten years, with those earnings adjusted for inflation so old dollars and new dollars compare fairly. Using ten years smooths out lucky and unlucky years. It is usually used for the whole US stock market, the S&P 500. When CAPE is higher than usual, stocks have tended to earn less per year over the next 10 to 20 years.

Inflation-Adjusted Ten-Year P/E

The cyclically adjusted price-to-earnings ratio, also called CAPE, the Shiller P/E, or P/E 10, is a measure of how expensive stocks are. It divides the current price by the average of the past ten years of earnings, with each year's earnings adjusted for inflation. The ordinary price-to-earnings ratio uses just one year of earnings, which can swing a lot with booms and recessions; averaging over ten years smooths out the business cycle, hence 'cyclically adjusted.' It is usually applied to the US S&P 500 stock market. People use it to judge whether the market is overvalued or undervalued and to estimate long-term future returns: higher-than-average CAPE values have been associated with lower-than-average returns over the next 10 to 20 years.

The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10) is a valuation measure most often applied to the US S&P 500. It is defined as the current price divided by a ten-year moving average of real (inflation-adjusted) earnings. Averaging over a decade dampens the cyclical swings in earnings that make the standard one-year P/E volatile, which is the point of the "cyclical adjustment." It is used to compare current market price with the inflation-adjusted earnings record and so to judge whether a stock or index looks undervalued or overvalued. Its main application is to long horizons: higher-than-average CAPE values have been associated with lower-than-average annualized returns over the following 10 to 20 years. It is a variant of the ordinary P/E ratio, and applying the label requires the ten-year, inflation-adjusted averaging, not merely any price-to-earnings figure.

Scope of Application¶

Background. From the 1940s, Sir John Templeton used a method adapted from Graham and Dodd, and somewhat similar to the later Shiller P/E, but with the Dow Jones Industrial Index.
Use in forecasting future returns. Reinvesting earnings in the business is done in the expectation of growing future earnings, and this earnings growth should ideally be accounted for when smoothing earnings over the previous ten years.
Documented setting. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term.
Documented setting. The ratio is used to gauge whether a stock, or group of stocks, is undervalued or overvalued by comparing its current market price to its inflation-adjusted historical earnings record.
Background. Value investors Benjamin Graham and David Dodd argued for smoothing a firm's earnings over the past five to ten years in their classic text Security Analysis.

Clarity¶

A clear use of Cyclically adjusted price-to-earnings ratio names the carrier, the operative relation, and the conditions under which the source treats the identity as present. The minimal definition is The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10 ratio) is a stock valuation measure usually applied to the US S&P 500 equity market.

Manages Complexity¶

Cyclically adjusted price-to-earnings ratio compresses multiple cross-domain formal modeling details into a stable diagnostic relation. The source shows both the central mechanism—thus, a common debate is whether the inverse CAPE ratio should be further divided by the yield on 10 year Treasuries, a common measure of risk-minimised return.—and the practical consequence—the ratio is used to gauge whether a stock, or group of stocks, is undervalued or overvalued.

Abstract Reasoning¶

Type the carrier. Identify the cross-domain formal modeling entities to which the claim applies.
State the relation. Use the source-grounded identity: The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10 ratio) is a stock valuation measure usually applied to the US S&P 500 equity market.
Check operation and conditions. Research by Norbert Keimling has demonstrated that the same relation between CAPE and future equity returns exists in every equity market so far examined.
Demand recognition evidence.

Knowledge Transfer¶

Within the home domain. Knowledge about Cyclically adjusted price-to-earnings ratio transfers literally when a new case preserves the same carrier type, relation, and recognition test. From the 1940s, Sir John Templeton used a method adapted from Graham and Dodd, and somewhat similar to the later Shiller P/E, but with the Dow Jones Industrial Index. Reinvesting earnings in the business is done in the expectation of growing future earnings, and this earnings growth should.

Relationships to Other Abstractions¶

Current abstraction Cyclically adjusted price-to-earnings ratio Domain-specific

Parents (1) — more general patterns this builds on

Cyclically adjusted price-to-earnings ratio is a kind of Ratio Prime

Cyclically adjusted price-to-earnings ratio is a strict kind of Ratio: The cyclically adjusted price-to-earnings ratio (CAPE, Shiller P/E, or P/E 10 ratio) is a stock valuation measure usually applied to the US S&P 500 equity market.

Hierarchy path (1) — routes to 1 parentless root

Cyclically adjusted price-to-earnings ratio → Ratio → Comparison → Self Checking

Neighborhood in Abstraction Space¶

Cyclically adjusted price-to-earnings ratio sits in a moderately populated region (59^th percentile for distinctiveness): it has near-neighbors but no dense thicket of look-alikes.

Family — Financial Ratios & Instruments (20 abstractions)

Nearest neighbors

Computed from structural-signature embeddings · 2026-10-08