Cyclically Adjusted Price-to-Earnings Ratio (CAPE)

The Cyclically Adjusted Price-to-Earnings (CAPE) ratio — also known as the Shiller P/E ratio, named after Nobel laureate Robert Shiller who popularised it — is a valuation metric that measures the current price of a stock index relative to its average inflation-adjusted earnings over the prior 10 years, smoothing out the cyclical volatility in corporate earnings that causes the conventional trailing P/E ratio to give distorted signals at market peaks (when earnings are temporarily high) and troughs (when earnings collapse). A high CAPE ratio suggests that the market is expensive relative to its long-run earnings power and has historically been associated with lower subsequent long-term returns, while a low CAPE indicates relative undervaluation and has predicted better forward returns. For macro-oriented investors and asset allocators on Ventura Securities, the CAPE ratio for Indian equity indices (Nifty 50) provides a long-run valuation anchor for assessing whether the market is expensive or cheap on a historically normalised basis — particularly useful for making strategic asset allocation decisions between equity, debt, and other asset classes over multi-year investment horizons.