Cyclically adjusted price-to-earnings ratio
The cyclically adjusted price-to-earnings ratio is a valuation metric that divides an asset's price by its average inflation-adjusted earnings over the preceding ten years.
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A stock valuation ratio that divides price by inflation-adjusted average earnings over the prior ten years.
- How it is used
- Adjusts historical S&P 500 returns for valuation changes when estimating expected returns.
- How deep it goes
- Defines CAPE and implements annual data preparation and OLS regression, without detailing broader valuation interpretation.
- Examples
- Uses VFINX returns, Robert Shiller’s CAPE spreadsheet, annual resampling, and CAPE-change regression.
- What you can do after
- Apply it via pandas, yfinance, pandas-datareader, and statsmodels to construct CAPE data and estimate return relationships.
Investing for Programmers
A cyclically adjusted price-to-earnings ratio is a stock-market valuation metric that divides a current stock or index price by average inflation-adjusted earnings over the preceding ten years.
- How it is used
- Uses long-term market valuation to inform equity allocation and risk assessment.
- How deep it goes
- Defines the ten-year real-earnings formula, gives thresholds, and explains limitations without promising precise timing.
- Examples
- Uses S&P 500 readings, a 16–18 historical average, and illustrative thresholds above 30 or below 10.
- What you can do after
- Evaluate long-term market valuation and adjust equity exposure without treating the ratio as a prediction.
Read how Investing for Programmers explains cyclically adjusted price-to-earnings ratio →
Related concepts
- price-to-earnings ratiocontrasts with · A price-to-earnings ratio compares a company’s or stock’s market price with its earnings per share.
- valuationmeasures · Valuation is an estimate of the economic or market worth of an asset, business, investment, or ownership interest.
- stockconfigures · Stock is a financial security representing an ownership interest in a company, often divided into shares that may confer economic or governance rights.
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