how to calculate the p e 10 ratio
the p e 10 ratio is calculated as follows take the annual eps of an equity index such as the s p 500 for the past 10 years adjust these earnings for inflation using the consumer price index cpi that is adjust past earnings to today s dollars take the average of these real eps figures over the 10 years divide the current level of the s p 500 by the 10 year average eps number to get the p e 10 ratio or cape ratio the p e 10 ratio varies a great deal over time according to data first presented in irrational exuberance which was released in march 2000 coinciding with the peak of the dotcom boom and updated to cover the period 1881 to august 2020 the ratio has varied from a low of 4 78 in december 1920 to a high of 44 20 in december 1999 as of august 2020 the historic p e 10 average was 17 1 3 using market data from both estimated 1881 to 1956 and actual 1957 onward earnings reports from the s p index shiller and john campbell found that the lower the cape the higher the investors likely return from equities over the following 20 years a criticism of the p e 10 ratio is that it is not always accurate in signaling market tops or bottoms for example an article in the september 2011 issue of the american association of individual investors journal noted that the cape ratio for the s p 500 was 23 35 in july 2011 4 comparing this ratio to the long term cape average of 16 41 would suggest that the index was more than 40 overvalued at that point the article suggested that the cape ratio provided an overly bearish view of the market since conventional valuation measures like the p e showed the s p 500 trading at a multiple of 16 17 based on reported earnings or 14 84 based on operating earnings 4 although the s p 500 did plunge 16 in one month from mid july to mid august 2011 the index subsequently rose more than 35 from july 2011 to new highs by november 2013 5 