"Using the cyclically adjusted price/earnings ratios published by Barclays Bank Plc, India recently overtook the US to become the world’s most expensive major stock market."@johnauthers pic.twitter.com/anXhnW2Fzq
— Daily Chartbook (@dailychartbook) June 6, 2024
CAPE in economic terms refers to the Cyclically Adjusted Price-to-Earnings Ratio (CAPE ratio). It’s a valuation metric used to assess the stock market’s overall price relative to the companies’ average earnings over a longer period (typically 10 years).
Here’s a breakdown of what CAPE tells us:
- Long-term view: By considering average earnings over a decade, CAPE aims to smooth out fluctuations in corporate profits that occur due to business cycles. This provides a broader picture of a company’s or the stock market’s overall value compared to just looking at the current price-to-earnings ratio (P/E ratio).
- Inflation adjustment: The CAPE ratio uses real earnings per share (adjusted for inflation) to account for the changing value of money over time. This allows for a more accurate comparison of earnings across different periods.
- Valuation indicator: A high CAPE ratio might suggest the stock market (or a specific company) is overvalued, while a low CAPE could indicate undervaluation. However, it’s important to consider historical CAPE averages and other economic factors for a more complete picture.
Here are some resources for further reading:
- Investopedia – CAPE Ratio: www.investopedia.com/terms/c/cape-ratio.asp
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