Shiller CAPE vs Implied Return

The site Guru Focus has a cool interactive feature that lets you pull your mouse across their charts for a better sense of the annual dance between PE ratio, CAPE ratio, interest rates and returns. Below is the chart of implied return from today’s valuation given the following:

Shiller P/E Implied Market Return

If we assume that over the long term, the Shiller P/E of the market will reverse to its historical mean of $mean, the future market return will come from three parts:

  1. Contraction or expansion of the Schiller P/E to the historical mean
  2. Dividends
  3. Business growth

The investment return is thus equal to:

Investment Return (%) = Dividend Yield (%) + Business Growth(%) + (Mean_Shiller_PE/Current_Shiller_PE)(1/T)-1

From this we will estimate that at the Shiller P/E’s current level, the future market return will be around 1.2% a year. This is the historical implied return, actual return and long term interest. Interest rate does have an impact on the market returns.


Follow the link below for the interactive version:

Shiller P/E – A Better Measurement Of Market Valuation (GuruFocus)


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