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CAPE ratio suggesting the S&P 500 may be a Buy

Dec 28, 2018

  

  • Since its high in mid-September, the S&P500 fell 19.75% to its low on December 24th, closing at 2351, coming within whispering distance of bear market territory
  • From that low the S&P500 has rallied back 5.86% on Wednesday and Thursday of this week
  • According to an analysis of the S&P 500 cyclically adjusted P/E ratio (CAPE), S&P 500 stocks valuations are in-line with their long-run average : the spread between the CAPE Yield (inverse of the CAPE) minus the “real” yield for the US 10-year is at 2.64%, in-line with its average over the last 4 decades, which suggests the implied risk premium for the S&P 500 is  not low and that stocks are not “expensive”
  • The Cyclically Adjusted P/E (CAPE ratio) is a valuation tool used to measure the "real" valuation of an stocks index to determine whether it is is undervalued or overvalued.  The CAPE achieves this objective by focusing on  the average real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle.

 

S&P500 Index    Cyclically Adjusted Price/Earnings Ratio - 5 Years