This Stock Market May Not Be That Overpriced After All

According to the cyclically adjusted price/earnings, or CAPE, the S&P 500 index is more highly priced than at any other time since 1871—except at the top of the internet bubble in early 2000.

That claim may be erroneous, according to a new study that purports to have improved on the CAPE ratio, which was made famous by Yale University finance professor and Nobel laureate Robert Shiller. 

The study’s authors report that over the past 60 years, their new version of the CAPE ratio did a better job than the traditional one of predicting the stock market’s subsequent return.

The new study, entitled “Current Constituents CAPE,” 

https://www.researchaffiliates.com/publications/articles/1070-current-constituents-cape

was conducted by Trent Commins, Ted Hsu, and Seanna Kim of Research Affiliates, the investment advisory firm. 

The authors of this new study believe that this approach becomes flawed when a stock is deleted from the index and replaced by a new one. 

That’s because the deleted stock’s earnings will remain part of the traditional CAPE’s calculation for 10 years after its deletion, and only gradually will the replacement stock’s earnings be included.

Mark Hulbert MarketWatch 17 February 2025

https://www.marketwatch.com/articles/stock-market-not-overpriced-cape-dbfa117f