CAPE Ratio (P/E10) Based Only on Current Index Components

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. This approach ignores stocks added to or deleted from the index during those 10 years. Is there a more timely and useful way to aggregate earnings? In their January 2026 paper entitled "CAPE Ratios and Long-Term Returns", Rui Ma, Ben Marshall, Nhut Nguyen and Nuttawat Visaltanachoti introduce Component CAPE, which each year divides current real S&P 500 Index level by historical annual real reported earnings for current S&P 500 Index stocks weighted by market capitalization.  They consider six ways to aggregate earnings:

1. Average over the last 10 years.
2. Average over the last five years.
3. Exponentially weighted moving average (EWMA) over 10 years.
4. Total Return CAPE, accounting for share buybacks/dividends over 10 years.
5. Payout-adjusted CAPE, adjusting for level of retained earnings over 10 years.
6. Operating earnings (excluding one-time items within as-reported earnings) over 10 years.

They measure CAPE performance via predictive regressions with a constant predictive slope coefficient 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. They account for data snooping bias from multiple tests (two CAPEs and six ways to aggregate earnings) using two separate corrections. To assess economic value of predictions, they calculate the certainty equivalence return (CER) for quadratic risk aversion of an 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: