CAPE vs forward P/E: Which is best?

ON THE US

Market bulls will likely cite the standard forward P/E ratio but bears will point to Shiller's CAPE. Charles Schwab's Liz Ann Sonders explains why CAPE advocates are wrong.

Ask a market bear about valuation and he will likely say the market is very expensive. Ask a market bull about valuation and she will likely say the market remains cheap. What gives? Assuming by ‘valuation’, one means the price to earnings (P/E) ratio, the answer is in the eye of the beholder… or a function of the earnings denominator one plugs in. The bear is likely to cite one of two popular P/E ratios, Robert Shiller’s Cyclically Adjusted P/E (CAPE); while the bull is likely to cite the other, the standard forward P/E. The CAPE’s numerator is the real (inflation-adjusted) price lev...