To which earnings (“E”) should we apply the P/E ratio? Valuation should be based on future earnings, not current earnings.”
Robert Shiller, Yale Professor and Nobel Laureate, suggests a P/E ratio that normalizes earnings over the last 10 years and adjusts for inflation (the
cyclically adjusted price-earnings ratio, or “CAPE”). The 10-year period is meant to represent a full business cycle.
But Rob Arnott, Vitali Kalesnik, and Kim Maturzo (2018) point out that:
"Since 1996, the U.S. CAPE ratio has been above its long-term average (16.6) 96% of the time, and above 24, roughly one standard deviation above its historical norm, more than two-thirds of the time. This dislocation is long enough to make even the most ardent fans of the CAPE, take pause."
