One of the best measures for whether stocks are over- or undervalued is the famous "cyclically adjusted price/earnings" ratio, or CAPE, developed by Yale professor, and Nobel laureate, Robert Shiller. The CAPE's main contribution is adjusting for times when earnings are either enjoying an unsustainable boom, or stuck in a temporary rut. Indeed, the high volatility of corporate profits tends to distort P/Es as reported. A huge surge in EPS that's bound to fade when heightened competition restores margins to traditional norms artificially swells the denominator. That lowers P/Es measured at a single point in time, and makes shares look a lot cheaper, or less overpriced, than they really are.
In early July I wrote about what Apple's formidable P/E of 33—double the number in the mid-to-late 2010s—signals for its future returns. The scale of that multiple, and the gap between Apple's booming stock price and its staid fundamentals, I asserted, are actually understated for a basic reason: Its recent earnings are so gigantic versus most of its recent history that they're more likely to stagnate or drop than rise rapidly from here.
