CAPE ratios by sector

What the ten-year window does, and what it costs

CAPE replaces one year of earnings with ten, adjusted for inflation. The point is to stop the denominator moving with the cycle. A sector whose earnings collapse in a recession shows a spiking P/E at exactly the moment it is cheapest; CAPE does not, because nine other years are still in the average.

The cost is that the measure has a ten-year memory, and the memory does not distinguish between a cycle and a change. A sector that has permanently re-based its earnings — upwards or downwards — will look wrong on CAPE for a decade afterwards, because the average is still carrying years that no longer describe the business.

Energy is the clearest live example. It sits close to the top of its own historical range, which reads as expensive. But its ten-year earnings average still includes the 2015–16 and 2020 collapses, which drags the denominator down and pushes the ratio up. The reading is arithmetically correct and would mislead anyone who took it as a valuation signal without looking at what is in the average.

Why sectors cannot be ranked against each other on CAPE

Comparing the valuations of different industries can be tricky due to the diverse economic trends and growth prospects across sectors. Each industry operates under unique conditions that influence its valuation, making direct comparisons difficult. For example, technology companies have much higher growth expectations compared to more stable sectors like utilities, leading to higher CAPE ratios for tech stocks. This reflects the market’s optimism about long-term growth potential in technology, even though earnings may fluctuate more significantly than in other sectors.

Furthermore, some industries are more cyclical than others, meaning their performance is closely tied to economic conditions. For instance, Consumer Discretionary companies, which rely on consumer spending that varies with economic cycles, are more sensitive to economic booms and busts than Consumer Staples companies. The cyclicality of certain sectors causes their earnings to swing more widely, which, even with the 10-year smoothing effect in the CAPE ratio, can still influence the metric’s accuracy.

The CAPE ratio works most effectively when used to compare a sector’s current CAPE ratio to its historical average. This approach provides a clearer picture of whether a sector is overvalued or undervalued in relation to its own long-term trends, accounting for factors like cyclical fluctuations. By examining the current ratio in this context, investors can better assess whether the sector’s valuation is reasonable or if market sentiment is overly optimistic or pessimistic.

Crossing borders

CAPE travels between markets worse than most multiples. It is built on net earnings, so it absorbs every difference in corporate tax rates and in how much debt a market's companies carry. It is also inflation-adjusted over ten years, which means two markets with different inflation histories are not adjusting the same quantity.

The three-universe table above is published because the comparison is asked for and the series exist. It should be read as three separate histories rather than as a like-for-like ranking. For a cross-market sector comparison that is methodologically sound, use EV/EBITDA.

Two sectors that were redefined

Two of the eleven sectors are younger than the ten-year earnings window this measure needs, and it is worth knowing how each is handled.

Communication Services is a recent sector. Its earnings history is built from the companies that were part of the sector when it was first launched, carried back through time — so the series describes that group of companies, not whatever an older classification would have called them.

Real Estate was separated out of Financials relatively recently. The historic Financials CAPE here is calculated using Financials companies only, with real estate excluded throughout. The two series therefore do not overlap at any point in the history, and adding them back together would not reproduce the old combined sector.