The CAPE Ratio — short for Cyclically Adjusted Price-to-Earnings — is one of the most widely cited metrics for evaluating whether a stock market or index is overvalued, undervalued, or fairly priced. Developed by Nobel laureate Robert Shiller, the CAPE Ratio smooths out short-term earnings volatility by using 10 years of inflation-adjusted earnings.
The CAPE Ratio Calculator helps investors determine this value quickly, providing an insightful view into the broader market’s historical valuation trends. It is particularly useful for long-term investors and macro analysts interested in economic cycles and market timing.
Formula
CAPE Ratio = Market Price (P) ÷ Average Inflation-Adjusted Earnings (10-Year)
Where:
- Market Price (P) is the current price level of the index or stock.
- 10-Year Average Earnings is the average of real (inflation-adjusted) earnings per share (EPS) over the past 10 years.
A high CAPE suggests the market may be overvalued. A low CAPE may indicate undervaluation or opportunity.
How to Use the CAPE Ratio Calculator
- Enter the Market Price – Use the current price of the index or stock (e.g., S&P 500).
- Enter 10-Year Average Earnings – Use the average EPS adjusted for inflation over the past 10 years.
- Click “Calculate” – The result is your CAPE ratio.
This figure provides a broader perspective on valuation than the standard P/E ratio, which can be distorted by short-term earnings swings.
Example
Suppose:
- Market Price: 4,200
- 10-Year Average Inflation-Adjusted EPS: 110
CAPE Ratio = 4,200 ÷ 110 = 38.18
This means the current price is 38.18 times higher than the average inflation-adjusted earnings, which may indicate an expensive market.
FAQs
1. What does CAPE stand for?
CAPE means Cyclically Adjusted Price-to-Earnings.
2. Who created the CAPE ratio?
It was developed by economist Robert Shiller, earning it the alternate name Shiller P/E.
3. How is CAPE different from the regular P/E ratio?
CAPE averages 10 years of inflation-adjusted earnings, while P/E typically uses 12 months of unadjusted earnings.
4. What is a “good” CAPE ratio?
Historically, a CAPE below 15 suggests undervaluation, while above 25 suggests overvaluation — but context matters.
5. Can CAPE predict market crashes?
Not precisely, but a high CAPE has historically correlated with lower future returns.
6. Is CAPE reliable for individual stocks?
It’s best used for broad indices like the S&P 500. Individual stock earnings can be too volatile.
7. Where can I get 10-year average earnings data?
Sources include Robert Shiller’s website, FRED, or financial data providers like Bloomberg and Morningstar.
8. Does CAPE account for interest rates or inflation?
Yes, it uses inflation-adjusted earnings, but not interest rates directly.
9. How often should I check the CAPE ratio?
Monthly or quarterly is sufficient for long-term investors.
10. Does CAPE work in international markets?
Yes — but adjustments must be made for local inflation and market structures.
11. Is CAPE better than P/B or EV/EBITDA?
Not necessarily — it complements other valuation metrics and is best for macro valuation analysis.
12. Can CAPE be used in portfolio strategy?
Yes — some strategies adjust equity allocation based on CAPE levels (e.g., low CAPE = higher equity exposure).
13. What are the limitations of the CAPE ratio?
It doesn’t reflect changes in accounting standards, tax policies, or structural shifts in earnings.
14. How does inflation adjustment work in CAPE?
Each year’s EPS is adjusted using the Consumer Price Index (CPI) to reflect today’s dollars.
15. Is the CAPE ratio actionable in the short term?
Not usually — it’s more useful for forecasting long-term returns.
16. Can I use CAPE for sector-specific indices?
Yes, but only if you have accurate, long-term earnings data for that sector.
17. Why might CAPE be misleading in low interest rate environments?
Low rates can justify higher valuations, causing CAPE to look “high” even if justified.
18. Is there a forward-looking version of CAPE?
Not exactly — CAPE is historical by nature. For forward metrics, use Forward P/E.
19. Does CAPE consider share buybacks?
Not directly — though buybacks can affect EPS, which feeds into CAPE.
20. Is CAPE useful for crypto or other assets?
No — it’s designed for earnings-based instruments like equities.
Conclusion
The CAPE Ratio Calculator provides a robust lens through which to view long-term market valuation. While not a tool for short-term trading, it offers powerful insight into future market return potential, especially when used in conjunction with economic indicators, interest rate trends, and broader asset allocation strategies.
Investors who consider CAPE in their decision-making process are better equipped to gauge when markets may be overheated or ripe with opportunity. Use this calculator to stay grounded in historical context and build a portfolio informed by deep value insights.