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Abstract

Robert Shiller’s cyclically adjusted price–earnings ratio, or CAPE ratio, has served as one of the best forecasting models for long-term future stock returns. But recent forecasts of future equity returns using the CAPE ratio may be overpessimistic because of changes in the computation of GAAP earnings (e.g., “mark-to-market” accounting) that are used in the Shiller CAPE model. When consistent earnings data, such as NIPA (national income and product account) after-tax corporate profits, are substituted for GAAP earnings, the forecasting ability of the CAPE model improves and forecasts of US equity returns increase significantly.

About the Author(s)

Jeremy J. Siegel

Jeremy J. Siegel is Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. He is the author of numerous professional articles and two books, Stocks for the Long Run and The Future for Investors: Why the Tried and the True Triumph over the Bold and the New. Professor Siegel also serves as academic director at the Securities Industry Institute and as senior investment strategy adviser at WisdomTree Investments. He is the recipient of the Distinguished Leadership Award from the Securities Industry Association and the Nicholas Molodovsky Award from CFA Institute. For his published research, Professor Siegel has also been recognized with the Graham and Dodd Award from the Financial Analysts Journal and the Peter Bernstein and Frank Fabozzi Award from the Journal of Portfolio Management. He holds a PhD in economics from MIT.