How Is the Shiller P/E Calculated?

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In The Shiller Ten-Year P/E Ratio I wrote, “The Shiller P/E ratio is computed by taking the current price and dividing by the average inflation-adjusted earnings from the previous 10 years. This measurement is also known as the cyclically adjusted PE ratio (CAPE ratio), or P/E 10.”

Charlie Tian’s GuruFocus.com has a nice article on Shiller P/E – A Better Measurement of Market Valuation in which they write:

  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.

The also have this chart showing the historical and current value of the Shiller P/E:

And if you would like to learn how to apply these numbers:

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  5. Using Dynamic Asset Allocation to Boost Returns

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.