Apple and Alphabet’s Freakish Earnings Broke This Market Barometer

One of the most widely followed gauges of the stock market, for decades a reliable indicator of future returns, has led investors astray in recent years. Its misdirection comes down to the freakish earnings growth of big technology companies such as Apple Inc. and Alphabet Inc. But there’s a way to revamp this market barometer as worries about elevated expectations and prices grow.

I’m referring to the cyclically adjusted price-earnings ratio, affectionately known as the CAPE ratio. The CAPE attempts to answer a basic question: When investors buy a stock, they are essentially buying a stake in a company’s earnings, so how much are they paying for those earnings? The CAPE normally applies that question to a broad tracker, such as the S&P 500 Index, by calculating the ratio of the index’s price to a 10-year trailing average of its earnings per share after inflation.