Shiller P/E – A Better Measurement of Market Valuation

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Date: Mon, 22 Dec 2014 21:32:11 -0600 (Updated every 10 minutes)

Shiller P/E: 27.4 (+ 0.38%)

Shiller P/E is 65.1% higher than the historical mean of 16.6
Implied future annual return: 0.2%
Historical low: 4.8
Historical high: 44.2
S&P 500: 2078.54
Regular P/E: 20 (historical mean: )

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market's valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either.

GuruFocus calculates the Shiller P/E ratio of individual stocks and different sectors. Here you can see the Sector Shiller PE, it shows you which sectors are the cheapest. Here you can see Shiller P/E of individual stocks.

How Is the Shiller P/E Calculated?

  1. Use the annual earnings of the S&P 500 companies over the past 10 years.
  2. Adjust the past earnings for inflation using CPI; past earnings are adjusted to today's dollars.
  3. Average the adjusted values for E10.
  4. The Shiller P/E equals the ratio of the price of the S&P 500 index over E10.

Why Is the Regular P/E Ratio Deceiving?

The regular P/E uses the ratio of the S&P 500 index over the trailing-12-month earnings of S&P 500 companies. During economic expansions, companies have high profit margins and earnings. The P/E ratio then becomes artificially low due to higher earnings. During recessions, profit margins are low and earnings are low. Then the regular P/E ratio becomes higher. It is most obvious in the chart below:

The highest peak for the regular P/E was 123 in the first quarter of 2009. By then the S&P 500 had crashed more than 50% from its peak in 2007. The P/E was high because earnings were depressed. With the P/E at 123 in the first quarter of 2009, much higher than the historical mean of 15, it was the best time in recent history to buy stocks. On the other hand, the Shiller P/E was at 13.3, its lowest level in decades, correctly indicating a better time to buy stocks.

Shiller P/E Implied Market Return

If we assume that over the long term, the Shiller P/E of the market will reverse to its historical mean of $mean, the future market return will come from three parts:

  1. Contraction or expansion of the Schiller P/E to the historical mean
  2. Dividends
  3. Business growth

The investment return is thus equal to:

Investment Return (%) = Dividend Yield (%) + Business Growth(%) + (Mean_Shiller_PE/Current_Shiller_PE)(1/T)-1

From this we will estimate that at the Shiller P/E's current level, the future market return will be around 0.2% a year. This is the historical implied return, actual return and long term interest. Interest rate does have an impact on the market returns. Click on the legend of the chart below to show/hide chart series.

In reality, it will never be the case that Shiller P/E will reverse exactly to the mean after 8 years. Table below give us a better idea on the range of the future returns will be if the market are within 50% to 150% of the mean.

ScenarioShiller P/E after 8 YearsAnnual Return from Today (%)
Really LuckyMean x 150%5.1%
LuckyMean x 125%2.9%
Reverse to the MeanMean x 100%0.2%
UnluckyMean x 75%-3.1%
Really UnluckyMean x 50%-7.6%

Investment Strategies at Different Market Levels

The Shiller P/E and the ratio of total market cap over GDP can serve as good guidance for investors in deciding their investment strategies at different market valuations. Historical market returns prove that when the market is fair or overvalued, it pays to be defensive. Companies with high quality business and strong balance sheet will provide better returns in this environment. When the market is cheap, beaten down companies with strong balance sheets can provide outsized returns.

To summarize:

  1. When the market is fair valued or overvalued, buy high-quality companies such as those in the Buffett-Munger Screener.
  2. When the market is undervalued, buy low-risk beaten-down companies like those in the Ben Graham Net-Net Screener. Buy a basket of them and be diversified.
  3. If market is way over valued, stay in cash. You may consider hedging or short.

Again, here you can see the Sector Shiller PE, it shows you which sectors are the cheapest. Here you can see Shiller P/E of individual stocks.

Add Notes, Comments

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User Comments

ReplyJlp1965 - 1 month ago
Do you offer data on Shiller PE for Australia (ASX or portion of it) in your premium membership?
ReplyDjfield0@google - 8 months ago
While I do think the high P/E is problematic, I wonder about the indexing of the same to CPI. If CPI is no longer a reliable measure of inflation (as many believe), the CAPE10 could also be impacted by the same factor.

For example, if inflation is 3% and CPI is 2%, then the figures could be over 10% off in the early years of the decade.
ReplyRpostman - 9 months ago

Shiller notes that his P/E has demonstrated LONG term correlation with stock prices. It just has to be used correctly. Here is Siller's advice:

He says that the CAPE (his P/E) "is NOT a market timing mechanism, It is continual and it does not tell you -- wait until the market goes all the way down to a CAPE of 7 or something. Right now (at about 24) the CAPE is high but it's not super high." He does advise that as the CAPE goes up it it may be prudent to invest lesss and expect less in the way of LONG TERM gains." There are other important variables.

However, another researcher says that the resaerch indicates problems seem to begin when the CAPE is above 26x, and we are very close to that now. When we get in this range I become much more cautious, particulaly with the "regular" S$P 500 PE near 20.

I suspect we're in the very late ininmgs, perhaps the last, for nowe.
ReplyJhoninck - 11 months ago
has anybody done some backtesting with the shiller PE ?
don't think it yields something profitable and I fear it will have long periods of large drawdowns.
ReplyGurufocus - 11 months ago
"Can you perform the Schiller P/E Valuation for global stock markets?" sorry that not enough data is available for Global Market Shiller P/E calculation. But we do have Shiller P/E for individual stocks. Also Global Market valuation here:
ReplyRjmmd - 11 months ago
Can you perform the Schiller P/E Valuation for global stock markets? I would find that very helpful. Thank you!
ReplyPjmason14 - 1 year ago
The mean in 1980 was roughly 14.50. It was lower then the current mean. The conclusions on valuations wouldn't have changed being that the Shiller P/E was well under 10 at that point.
ReplyURounder - 1 year ago
I would love to see a line on there showing how the average Shiller P/E has changed. It looks like the average now is probably higher than it was in 1980. It would be good to see how the average may be changing over time. Great Article!
ReplyChristiine_ng27@facebook - 1 year ago
I definitely agree with this article that the P/E ratio is a good general indicator of how the comapny is doing in the context of the current economy. However, one should not depend solely on this ratio, since other factors of the market must also be considered. I think this is a great article for beginners to start learning about P/E ratios. I've also learned alot about P/E ratios from this video which breaks it down step by step in just a couple minutes:
ReplyHenryl65@facebook - 1 year ago
He makes the classic error of using forward operating earnings at peak margins. Margins are currently 70% above the historical long term norm. Over time, like valuations, they revert to a mean. Also, he only uses data back to 1993...hardly far enough considering stocks are (or should be) very long-run investments.
ReplyBillbyte - 1 year ago
For a Shiller PE critique see: []
ReplyBrucechin - 2 years ago
Shiller's P/E as an indicator to buy stocks is pretty useless. Even as a gauge of the the stock market's valuation it's useless.
Point 1) As Birinyi points out, Shiller's P/E has been signalling to sell as we are over the mean since 2009 and has missed out on basically a market double from the bottom as it has gotten more expensive. Even at the bottom of 2009 it barely gave a buy signal with a Shiller P/E of 13.4
Point 2) As a stock market gauge it's also useless as evidenced now at 22x. Smoothing earnings out to try and get an understanding of a company's normalized earnings simplifies the role of business analysis needed to understand the economic drivers of a company.

Keep fundamental business analysis/modelling to determine where you think earnings will go and then use simple P/E, among many methods, to get value.
ReplyThe_laws - 2 years ago
I see that the Shiller PE is given for individual stocks on their summary quote page. Any chance that the Shiller PE could be made available for selection on the on the customized view for a portfolio? I export data from my personal portfolios to a spreadsheet for tracking various parameters, including valuation related items. But I see that Shiller PE is not currently available for selection in the "Customize This View" panel.
ReplyBeatsj - 2 years ago
I agree with previous posts that expanding this page to include some of the international markets would be very helpful.

Steve Pomeranz
ReplySteve Pomeranz - 2 years ago
I agree with Matteo, love to see one for Europe.
ReplyGurufocus - 2 years ago
The historical data is only quarterly. Although the current data for today.
ReplyBlacksand - 2 years ago
How do I view it on a monthly, weekly, daily basis, viewing just the most recent data? It is so long-term . . .
AJ Post
ReplyAJ Post - 2 years ago
since the Shiller P/E has only fell to its historical average twice since 1990, the last 22 years, would you recommend a buy single at 18 or 19 for the Shiller P/E?
ReplyMatteo78 - 2 years ago
How Is the Shiller P/E IN EUROPE?
ReplyChentao1006 - 2 years ago
ReplyTdimo - 3 years ago
Great site could be interesting to have Measurement of Market Valuation globally for example Euro Stoxx 600 and Pacific 600 Tony
ReplyGurufocus - 3 years ago
Predicted/actual return graph similar to the one on the market cap vs. gdp page has been added.
ReplyGurufocus - 3 years ago
It does include inflation.
ReplyAAAMPblog - 3 years ago
Is the Implied Future Return a Real Return or does it include inflation?
ReplyBenethridge - 3 years ago
Thanks for adding this feature.

What about 3? When the market is way overvalued, sell stocks and buy some other asset class that's currently undervalued. ;-)

Ben - 3 years ago
Thanks for the great new page. Do you plan to add predicted/actual return graph similar to the one on the market cap vs. gdp page?
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