India overtakes US as the world’s most expensive major stock market

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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).

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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.
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