Why is the traditional Price-to-Earnings (PE Ratio) misleading?

The traditional Price-to-Earnings ratio (PE) is calculated by dividing the price of the S&P 500 Index by the component companies’ trailing 12-month earnings (Trailing-12-Month Earnings) ~
During economic expansion: profit margins are higher, and profitability is strong. Because the denominator (earnings) increases significantly, the PE ratio visually appears “artificially low,” masking the fact that valuations may already be too high.
During economic recession: companies’ profit margins contract, and profitability declines. At this time, even if stock prices have already fallen, the traditional PE ratio may appear higher because the denominator (earnings) has shrunk dramatically.
This phenomenon is called cyclical noise in earnings. Simply put, traditional PE often looks “cheap” at market tops because earnings are good, and “expensive” at market bottoms because earnings are poor.
Shiller CAPE (Schiller’s Cyclically Adjusted Price-to-Earnings) precisely addresses this by taking the 10-year average earnings and adjusting for inflation, removing the interference from short-term economic fluctuations, thereby reflecting market valuation levels more accurately ~
#席勒市盈率 # Macroeconomic Data #SPX