Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 217

What is the Shiller PE ratio telling us?

The rise in global equity prices in recent years has led to concerns over valuation levels. One indicator that appears to cause endless nervousness is the so-called 'Shiller' PE ratio. While the Shiller PE ratio is a poor short-run market timing tool, it has proven to be a reasonable guide for likely longer-run returns in the past. However, allowance today needs to be made for the large structural decline in interest rates.

The Shiller PE ratio is high

Made famous by Nobel-prize winning economics professor Robert Shiller, the Shiller or 'cyclically adjusted' PE ratio (SPER) compares the level of US share prices to the 10-year moving average level of earnings. The indicator became popular after Shiller used the analysis during the dotcom bubble to suggest the market was overvalued and lower returns could be expected over coming years, and he was eventually proven right!

As seen in the chart below, the current level of the SPER is around 30, which is above its average since the 1880s of 16.7. The SPER is higher than during the peak of the late-1960s bull market, and close to the level in 1929 (32.5), but still well below the peak of 44.2 in 1999.

Shiller PE Ratio: 1880 to 2017

Source: Prof. Shiller, Yale University

It’s not a great market timing tool

Does this mean the market is about to crash? As seen in the chart below, the SPER has tended to be above average for the much of the past two decades. Indeed, it continued to rise for an extended period through the late 1990s bull market, and hovered above 25 for most of the commodity-driven bull market prior to the financial crisis. As a short-run market timing tool, the SPER has not been much help!

The longer-run outlook for stocks is potentially more sobering

The SPER has had better success as an indicator of longer-run likely returns. As seen in the chart below, relatively high levels of the SPER have tended to be associated with relatively low real share price returns over the following 10-year period. Indeed, the last three times the SPER hit 30 (back in the late 1920s and again twice during the dotcom bust), subsequent 10-year real share prices returns were negative. That does not bode well for likely US share price returns over the coming decade!

Shiller PE Ratio and subsequent 10-year real share price returns

Source: Prof. Shiller, Yale University

A complicating factor in extrapolating historical patterns is the huge cycle of rising then falling interest rates over the past 50 years. Equity markets faced the headwind of rising rates from the 1960s to the early 1980s, then enjoyed the tailwind of falling rates for the past 35 years.

As seen in the chart below, if we invert the SPER to generate a ‘Shiller earnings yield’ and compare this to real bond yields, current equity market valuations appear less troublesome. The Shiller earnings-to-bond yield gap is currently around 2.7% compared with a long-run average of 4.7%, but past periods of weak 10-year real share returns (in 1929, 1966 and 2000) were associated with earnings to bond yield gaps closer to zero.

Shiller Earnings to Real-Bond-Yield Gap and Subsequent 10-year Real Share Price Returns

Source: Prof. Shiller, Yale University

Compared with 1929, 1966 and 2000, this method of stock market valuation is not flashing red.

 

David Bassanese is Chief Economist at BetaShares, which offers Exchange-Traded Funds listed on the ASX. BetaShares is a sponsor of Cuffelinks. This article contains general information only and does not consider the investment circumstances of any individual.

RELATED ARTICLES

Why the tech giants still impress

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

Shares

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Shares

The ASX is full of old, stodgy, low-growth companies

Eight of the ASX's top 10 stocks are more than a hundred years old, while in the US there's just one. It points to our market being filled with low-growth dinosaurs compared to the US where innovation and renewal rule.

Retirement

Time to review the family home's exemption from Age Pension test

Improving housing mobility in Australia is crucial for enhancing both individual well-being and the economy. Potential reforms include ensuring greater rental security and incentivising downsizing among older homeowners.

Superannuation

Death benefits from super don't need to be this complicated

This may surprise you, but a person's super balance does not automatically form part of their estate. A simple change could bring greater certainty to Australians, quicker payouts for families, and lower super fees.

Economy

The RBA deserves kudos for a job well done

Over the past few years, the Reserve Bank of Australia has been subjected to a blizzard of criticism. Yet, despite its flaws, it may just have engineered that rarest of beasts: the fabled soft economic landing.

Investing

Asia deserves a closer look from investors

As part of their global exposure, Australian investors typically allocate most to Developed Markets equities, and a smaller portion to Emerging Markets. This looks at the latter position and whether there might be a better way.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.