The Shiller P/E ratio is a measure often applied to the US equity market.

ALSO READ: The History of Silicon Valley: Start-ups And Their Forefathers

Invented by Professor Robert Shiller of Yale University, it is a specific metric that helps investors figure out if a market or company is overvalued or undervalued.

The Schiller P/E ratio is a type of P/E ratio, so why don’t we tackle that first.

What is a P/E ratio?

*** SPECIAL ALERT -- May 10, 2020 -- Motley Fool Stock Picks On FIRE! ****

The recent Motley Fool stocks picks, even with this COVID crisis, are STILL performing well and beating the SP500! Here are some of their most recent picks and their performance:
  • Shopify (SHOP) – April 2, 2020 pick and it is already up 90%
  • Zoom Video (ZM) – March 19, 2020 pick and it is already up 16%
  • DexCom (DXCM) picked Feb 20, 2020 right before the market crashed and it is still up 17%
  • Tesla (TSLA) picked January 2, 2020 before the crash and it is up 77% compared to the SP500 -12% so it is ahead of the market by 89%
  • HubSpot (HUBS) picked December 5, 2019 and it is up 4%
  • Netflix (NFLX) picked November 21, 2019 and it is up 37%
  • Trade Desk (TTD) picked November 11, 2019 and up 50%
  • Zoom Video originally picked Oct 3 and it is up 87%
  • SolarEdge (SEDG) picked September 19, 2019 and it is up 20%
  • Zoom was also picked October 3, 2019 and it is up 95% since then.
The average stock they've recommended is up a life-changing 346% - more than 4X the return of the S&P 500 ! Now, no one can guarantee that every pick in Stock Advisor will have the same mind-blowing returns as Netflix and Disney. But you sure don't want to risk missing out.

Normally the Fool service is priced at $199 per year but they are currently offering it for just $99/year if you click this link

Hurry! Order now so you will get their next stock pick! Here is the expected schedule of release dates for their stock picks...:

  • June 4 - Tom's New Recommendation
  • June 11 - Tom's New Best Buys Now
  • June 18 - David's New Recommendation
  • June 25 - David New Best Buys Now

CLICK HERE to get The Motley Fool's Stock Picks for just $99 per Year! 

A P/E ratio simply stands for the Price to Earnings ratio. You take the price of a stock and divide it by the earnings per share to get some idea of whether a company is expensive or cheap.

For example, what is the P/E ratio of Apple?

Currently a single share of Apple stock trades at about $130. The earnings per share (EPS) is $8.35. Divide one by the other and that gives us a P/E ratio of 15.3.

What does 15.3 mean, in this context? That multiple tells us that if you were to buy a share of Apple right now, you’d be paying 15 times the earnings per share for the privilege. Think of it like the price tag of a stock.

The P/E ratio is often used as a point of comparison. The ratio for the broad U.S. stock market is about 26, and all things being equal, it indicates that the overall market is more expensive than a share of Apple alone. You might compare Apple’s P/E ratio to itself, over time, to see whether Apple is cheaper than it has been in the past, or you could compare it to other similar, tech companies to see how the iPhone-making giant stacks up.

Source: SeekingAlpha

What is a Shiller P/E ratio?

Take a second to think about what the P/E ratio is. We took the price of a single stock and divided it by the earnings per share.

Typically, the earnings per share (EPS) value uses the earnings over a period of twelve-months. A P/E ratio constructed this way would be called the trailing-twelve month P/E ratio. So if you divided the current share price by the previous year’s EPS then you are getting a sense of how expensive a stock is, in relation to its earnings for the year.

But people like to get creative, and they use all sorts of time-frames for the EPS.

What Shiller did, was extend the time period to 10 years.

Why is it useful?

This chart below shows us the traditional P/E ratio and plots it against the return of the overall U.S. market for the next 12 months.  

Source: SeekingAlpha

The scattershot nature of the graph tells us that the traditional P/E ratio doesn’t have any ability to forecast the return of the U.S. equity market.

Shiller found that by going to the 10-year P/E ratio, he was better able to forecast future stock market returns.

Source: SeekingAlpha

As you can see, there’s a much clearer trend there. The higher the Shiller P/E (CAPE is just another name for it), the lower the return of the market over the next 10-15 years.

The idea is that by looking at earnings over 10 years, you’re able to smooth out any weird fluctuations and get a clearer picture of where the economy is headed because very long-term earnings are correlated with future stock market returns.

Although the Shiller P/E ratio can be an effective tool, it shouldn’t be abused.

This ratio is a good indicator to look at, but it’s important to remember that most investors, analysts and market professionals will not base their decisions to buy and sell on the Shiller P/E ratio alone.



Get Up To $1,000 in Free Stock with Robinhood--the Commission-Free Brokerage!

Open a new account and receive one free stock valued at up to $500! Then, once your account is open, get more free stocks (value from $5 to $500) for each friend, family, person you refer! USE THIS LINK to get started with Robinhood!


  1. It intuitively make sense that R-squared would go up, if the earnings over 10 years (instead of 1 year) were used in PE ratios.

    But the question is, “Is a single metric like earnings really the best way to judge valuations?” Does it contain all the information that is needed to really understand a complex business?

    Hence, there is a case for looking at more detailed valuation methods such as full-form DCF. They explicitly involve more data points than a simple (simplistic) single-shot valuation metric.