High CAPE ratio stokes valuation worries

Current levels have historically corresponded to muted returns; ratio above the 90th percentile

- SACHIN P MAMPATTA

Notwithstanding indices being lower than the all-time high levels touched nine months ago, the stock market has rarely been as expensive as it is now on one particular metric.

The 10-year cyclically adjusted price-to-earnings (CAPE) ratio for the BSE Sensex is at 35.2x, according to data based on a study, Forecast or Fallacy? Shiller's CAPE: Market and Style Factor Forward Returns in Indian Equities, authored originally in July 2024 by Joshy Jacob, professor at the Indian Institute of Management, Ahmedabad, and Rajan Raju, director at Singapore-based family office Invespar.

The numbers are updated monthly. The latest valuations for May 2025 are typically associated with lower expected returns in the future. While the traditional price-to-earnings ratio considers valuations that are usually based on the immediate past or near future, the CAPE also considers the longer-term business cycle and adjusts earnings for inflation.