Context Is Key: Don’t Look At CAPE In A Vacuum

Cyclically Adjusted Price Earnings (CAPE) multiple should be looked at more deeply by considering the context around it, points out Citi in its recent report.

Tobias M Levkovich and the team at Citi Research note operating versus reporting earnings can generate very different CAPE outcomes.

CAPE to be worn appropriately

Citi analysts point out that in the face of high after-tax corporate margins aided by Fed-induced low financing rates, valuation has become the focus of discussion among investors. The analysts note that while various measures could argue for higher valuations including improvements in equity risk premiums or P/Es relative to inflation rates (as highlighted in the graph below), the locus of the argument has become the CAPE ratio.