At almost 26, the level of Shiller’s 10-year cyclically-adjusted price/earnings ratio (CAPE) is currently more than 65% above its average since 1881. But the CAPE is inflated because reported earnings collapsed during the last recession due to tough new accounting standards. When these are substituted for operating earnings since the latter’s introduction in the late 1980s, and an adjustment is made for changes to firms’ payout policy, the degree of overvaluation reduces to 30% or so. What’s more, various factors – such as lower and more stable inflation – may have raised the CAPE’s equilibrium level.
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