[this question probably focused to math nerds]
Shiller's CAPE ratio is calculated based on Price (Index or Stock) divided by 10 year average inflation adjusted earnings. This should mean that recent (stock or index) price changes should have a much bigger impact on the CAPE ratio than recent earnings, which are averaged or smoothed out over the past 10 years.
So the following is a bit unexpected:
June 1 2020: S&P 500 closed at 3055.73 with a CAPE ratio of 28.84
Dec 1 2022: S&P 500 closed at at 4076.57 with a CAPE ratio of 28.65
So the S&P increased by 33% between those dates, but CAPE remained (essentially) the same.
This means the denominator (average 10 years trailing earnings) had to also have increased in total by 33%. But since only 2.5 years went by, all that increase needed to push the 10 year trailing earnings average up by 33% needs to be in those 2.5 years. This would imply earnings increases on the order of more than 100% within those 2.5 years.
But the S&P 500 PE ratio was about 21.5 on June 1 2020 and about 20 on Dec 1 2022 so earning didn't really change much in relation to stock price (up only about 33% same as the index price rise).
So something doesn't make sense. How could the S&P500 be up so much with an unchanged CAPE ratio between 6/1/2020 and 12/1/2022 if earnings did not shoot through the roof between those two years.
I am sure it is something I am not understanding, but not sure what. My expectation is that index (stock) price changes should have a large effect on CAPE ratio when looking at recent years, as that is the whole point of how CAPE is supposed to work. So I would have expected the CAPE ratio to be much higher than it actually was on 12/1/2022
Thoughts? What am I doing wrong?
Submitted January 24, 2023 at 02:54AM by at-life42 https://ift.tt/Uk5TI9F
