The conventional Cyclically Adjusted Price-Earnings ratio (CAPE), or P/E10, divides current real S&P 500 Index level by average annual aggregate real index earnings as reported over the prior 10 years. Is there a more useful way to aggregate stock-level information? In the June 2026 revision of their paper entitled "CAPE Ratios and Long-Term Returns", Rui Ma, Ben Marshall, Nhut Nguyen and Nuttawat Visaltanachoti introduce Component CAPE, for which they each year:
- Calculate the CAPE ratio for each constituent stock based on either five or 10 years of past earnings.
- Weight individual stock CAPE ratios either by market capitalization (value) or by earnings.
They measure CAPE predictive performance via constant slope regression to calculate out-of-sample (OOS) R-squared, which relates the mean squared error of 10-year return predicted by CAPE to that predicted by historical average return. They start CAPE calculations in 1964, with OOS predictions commencing in 1974. To assess economic value of predictions, they calculate the certainty equivalence return (CER) for investors with power or quadratic risk aversions of a stocks/Treasury bills allocation strategy based on CAPE signals. Using S&P 500 Index level and aggregate earnings data and annual price and earnings data for individual S&P 500 components during 1955 through 2024, they find that:
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