Shiller P/E (CAPE)

The Shiller P/E divides an index's price by its average inflation-adjusted earnings over the trailing ten years, smoothing out the boom-bust earnings swings that make a single-year P/E lie at cycle turns. Robert Shiller and John Campbell built the measure — CAPE, for cyclically adjusted price-to-earnings — and Shiller's data on it runs back to 1881.

The long-run average sits around 17. The ratio reached about 30 before the 1929 crash, peaked near 44 in December 1999, and spent the late 2010s and much of the 2020s above 30 without any comparable collapse — which is the core lesson. High CAPE has historically predicted lower average returns over the following decade, but it is nearly useless for timing: markets have stayed expensive for 15+ years at a stretch.

Structural critiques have teeth too. Accounting standards changed (goodwill writedowns hit reported earnings harder post-2001), payout policy shifted from dividends to buybacks, and rate regimes differ, so comparing today's CAPE against the 1950s average is not a clean apples-to-apples read.