Research Affiliates introduces Current Constituents CAPE, which modifies the CAPE Ratio by using the current index constituents and offers potentially improved predictive power, particularly over the medium term.
Current Constituents CAPE
Research Affiliates
Seanna Kim, Ted Hsu, Trent Commins
Research
8 Pages
Key Takeaways
Improved forecasting potential: By basing the measure on the historical earnings of current S&P 500 constituents, CC CAPE offers a cleaner signal that may improve its utility in forecasting medium-term equity returns.
Accounts for reconstitution effects: CC CAPE reflects the valuation impact of removing low-growth firms and adding high-growth (often higher-valuation) companies—capturing the true nature of index evolution.
Current reading shows high—but not extreme—valuations: Both traditional CAPE and CC CAPE suggest today's U.S. equity market is richly valued, but CC CAPE indicates the current level, while elevated, is still below the bubble extremes of 2000.
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