What it means
An ordinary price-earnings ratio has a flaw: earnings in any single year can be boom-inflated or crash-depressed, making the market look cheap at peaks and expensive at troughs. The PE 10 fixes the denominator.
By averaging ten years of real, inflation-adjusted earnings, it values the market against its through-cycle earning power rather than this year's mood. The measure was popularised by Yale economist Robert Shiller, building on work with John Campbell in the 1980s and 1990s, and Shiller maintains the data series publicly on his Yale webpage.
Its forecasting record made its reputation. Very high PE 10 readings preceded the 1929, 2000, and other major market peaks, and low readings marked good times to buy, which is why long-horizon investors watch it.
The ratio is not a timing tool. Markets can stay expensive by this measure for years, and the 1990s taught anyone who sold on a high PE 10 in 1996 a painful lesson about patience.
Critics raise fair points: accounting rules changed over the century, interest rates justify different valuation levels, and the ten-year window can be haunted by ancient extremes, as the 2009 earnings hole lingered for a decade. Users adapt accordingly.
Some compare PE 10 to bond yields, others track percentile ranks within recent decades, and Shiller himself published an excess yield variant relating it to interest rates. For a non-finance reader, the PE 10 is the market's price tag measured against its average decade, not its latest headline.
High readings say the story is priced for perfection; low readings say despair is on sale. The ten-year window is long enough to cover most business cycles, which is the point.
A single recession can halve reported earnings for a year, but it barely dents a decade's average. Investors apply the same logic to individual countries and sectors.
Comparing PE 10 readings across markets helps spot where pessimism or euphoria has run furthest from earning power.
In practice
Real-world examples.
Example
A strategist notes the market's PE 10 above 35, a zone historically followed by weak ten-year returns, and counsels lowered expectations rather than panic selling. Lowered expectations, acted on calmly, beat heroic timing calls almost every cycle.
Example
After a crash drags the PE 10 to 13, a value investor increases equity exposure, citing the measure's strong record at depressed readings. The investor still buys in stages, because a low reading says the odds are favourable, not that the bottom has arrived.
Example
An analyst adjusts for the stale 2009 earnings still inside the ten-year window, arguing the raw PE 10 overstates expensiveness in 2018. The adjusted figure is lower, but the analyst reports both versions so readers can judge the argument.
Formula
Calculation
PE 10 equals the current price divided by the ten-year average of inflation-adjusted earnings. A market priced at 4,000 with average real earnings of 200 has a PE 10 of 20; the historical average for the US market sits in the mid-teens to high-teens depending on era.
Worked example. Suppose an index trades at 4,000 and its inflation-adjusted earnings over the past ten years averaged 200, with a worst year of 90 in a recession and a best year of 280 in a boom. PE 10 = 4,000 / 200 = 20. An ordinary one-year price-earnings ratio would show 4,000 / 90 = 44.4 using the worst year and 4,000 / 280 = 14.3 using the best year, which is why the one-year version swings so widely while the ten-year average stays steady.Case study
Seen in the real world.
This case study is fictional and illustrative. In late 2021, a made-up family office investment committee reviews its US equity allocation with the market's PE 10 near 38, a level exceeded only at the 2000 peak. The junior analyst argues for cutting equities by a third; the CIO counters that the ratio has signalled expensive for six straight years. They compromise: trim 10 percent, raise the quality tilt, and set a review trigger rather than a bet.
The market falls sharply the following year, and the trimmed position softens the drawdown modestly. At the post-mortem, the CIO frames the lesson carefully: the PE 10 told them the odds were poor for the decade ahead, not that a fall was due next quarter, and using it as a forecast of timing would have had them out of the market years too early. The committee keeps it as a compass, never a calendar.
Watch out
Common mistakes.
- Using the PE 10 to time entries and exits; it speaks about expected long-horizon returns, not next quarter's direction.
- Comparing today's reading to century-old averages without adjusting for changes in accounting, buybacks, and interest rates.
- Dismissing it entirely because it stayed high through a bull run; valuation measures discipline expectations, they do not schedule turning points.
Questions
People also ask.
What is the PE 10 ratio?
Price divided by the ten-year average of inflation-adjusted earnings, also called the CAPE or Shiller PE, used to value markets through the cycle.
Who created it?
It was developed by Robert Shiller with John Campbell, popularised in Shiller's book Irrational Exuberance, with data maintained on Shiller's Yale webpage.
What is a high reading?
The long-run average sits in the mid-teens to high-teens; readings above 25 have historically preceded subdued decade-ahead returns, though not necessarily immediate falls.
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