Robert Shiller CAPE Valuation Framework

Problem

Traditional PE can be noisy because of one-quarter earnings, business-cycle swings, and dividend-policy changes. When markets get rich, narratives and sentiment can push prices away from fundamentals. This skill uses Robert Shiller's CAPE / P/E10 framework to average ten years of inflation-adjusted earnings and estimate where a stock or index sits in its historical valuation range.

How It Works

It combines qualitative diagnosis with quantitative validation:
- Diagnose mainstream narratives and market sentiment, such as "always grows" or "scarce asset" stories.
- Screen for manipulation risk, opaque structures, hidden fees, related-party issues, or earnings-management motives.
- Add an institutional and historical lens, comparing regulation, capture risk, and past bubbles.

The quantitative core is E10 and CAPE:
- Adjust nominal EPS: real EPS(t) = nominal EPS(t) × CPI(current) / CPI(t).
- Average ten years of real EPS into E10, then compute CAPE = P / E10.
- Prefer Total Return CAPE when data are available to reduce dividend- or buyback-policy distortion.
- Cross-check with ECY, dividend yield, the Buffett indicator, and Tobin's Q.

Limits

The target needs at least ten years of trading and earnings history; otherwise fall back to PE, PB, or similar indicators. CAPE does not capture a fundamental shift in future growth, and its reliability is weaker when business models change sharply, accounting comparability is poor, or market-specific dynamics differ. The output is a valuation lens, not a trade signal.