What is the Shiller P/E Ratio?

The Shiller P/E ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, is a metric that calculates the price-to-earnings ratio of the S&P 500 index over a 10-year period. It’s a valuation metric that helps investors assess whether the market is overvalued, undervalued, or fairly valued.

How to Calculate the Shiller P/E Ratio

Calculating the Shiller P/E ratio involves the following steps:

Calculate the average annual earnings: Calculate the average annual earnings of the S&P 500 index over the past 10 years.
Calculate the current price: Calculate the current price of the S&P 500 index.
Calculate the Shiller P/E ratio: Divide the current price by the average annual earnings.

Interpretation of the Shiller P/E Ratio

A Shiller P/E ratio of:

Below 15: Indicates that the market is undervalued.
Between 15 and 25: Indicates that the market is fairly valued.
Above 25: Indicates that the market is overvalued.

What the CAPE ratio is saying in September 2026

As of early September 2026, the Shiller P/E sits around 41, within reach of its all-time record of 44.19 set in December 1999. The long run average, backtested to 1871, is about 17.4. The ratio has spent most of 2026 above 40, something that has happened only once before in history, during the dot-com boom.

History offers context, not a forecast. Periods when the CAPE ratio ran this hot have usually been followed by a decade of below-average returns, not by an immediate crash. Readings stayed elevated for years in the late 1990s before prices turned. A high reading tells you expected long term returns are thin, which is an argument for modest expectations and steady contributions, not for market timing.

Significance of the Shiller P/E Ratio

The Shiller P/E ratio is significant because it:

Provides a long-term perspective: The Shiller P/E ratio provides a 10-year perspective on market valuation, helping investors avoid short-term market fluctuations.
Helps investors avoid bubbles: The Shiller P/E ratio can help investors identify market bubbles and avoid overvalued markets.
Informs investment decisions: The Shiller P/E ratio can inform investment decisions by providing a valuation framework for the market.

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Limitations of the Shiller P/E Ratio

While the Shiller P/E ratio is a useful metric, it has its limitations:

Historical data: The Shiller P/E ratio is based on historical data, which may not reflect future market performance.
Ignores other factors: The Shiller P/E ratio ignores other factors that can impact market valuation, such as interest rates and economic growth.
Not a timing tool: The Shiller P/E ratio is not a timing tool and should not be used to make short-term investment decisions.

What the ratio has gotten wrong

Honesty requires the other side of the ledger. The CAPE ratio spent most of the 2010s and 2020s in territory the old rule of thumb called overvalued, yet investors who stayed the course did very well. Several structural changes help explain the misses: corporate accounting treats research spending as an expense rather than an investment, which understates earnings for tech-heavy companies; share buybacks have replaced dividends as the main way cash returns to owners, changing how earnings per share behave; and profit margins for large companies have run higher for longer than the old data suggested was possible.

The fair conclusion is modest. The Shiller P/E remains one of the best tools for judging long run market valuation, but its fixed cutoffs are calibrated to a different economy than the one we live in. Use it to set expectations, not to make moves. An investor who pairs the price-to-earnings ratio with the CAPE ratio, and both with an index fund habit through S&P 500 cycles, gets almost all of the benefit with none of the timing risk.

Alternatives to the Shiller P/E Ratio

Other valuation metrics that can be used to assess market valuation include:

Price-to-earnings (P/E) ratio: Calculates the current price of a stock or index divided by its earnings per share.
Price-to-book (P/B) ratio: Calculates the current price of a stock or index divided by its book value.
Dividend yield: Calculates the ratio of the annual dividend payment to the current price of a stock or index.

Final Thoughts

The Shiller P/E ratio is a powerful metric that can help investors assess market valuation and make informed investment decisions. By understanding its definition, calculation, and significance, investors can gain a deeper understanding of the market and avoid costly mistakes.

Frequently Asked Questions

What is the difference between the Shiller P/E ratio and the P/E ratio? The Shiller P/E ratio calculates the price-to-earnings ratio over a 10-year period, while the P/E ratio calculates the current price-to-earnings ratio.
How do I calculate the Shiller P/E ratio? Calculate the average annual earnings of the S&P 500 index over the past 10 years, calculate the current price, and divide the current price by the average annual earnings.
What are the limitations of the Shiller P/E ratio? The Shiller P/E ratio is based on historical data, ignores other factors, and is not a timing tool.

By unlocking the power of the Shiller P/E ratio, investors can gain a deeper understanding of market valuation and make more informed decisions about their financial future.