An interesting article on PE10 was written by Swedroe and mentioned at Bogleheads. Here is the Swedroe article link:
Swedroe: CAPE 10 Ratio In Need Of Context | ETF.com
Swedroe makes several adjustments to the standard CAPE calculation. Every single adjustment serves to either reduce the current calculation or raise the median benchmark to make current levels seem more reasonable.
Seriously? Every. Single. One?
That doesn't sound like someone making objective adjustments to improve a calculation. That sounds like someone making adjustments to achieve a desired outcome.
So what does he propose?
Use a 60 year average to calculate the median CAPE
On his list of adjustments I think this one makes the most sense. There are lots of good reasons to think that the equity risk premium is lower today than it was in 1950 (meaning higher stock valuations). And even at the depths of the 2009 market crash CAPE only briefly breached 12x before immediately bouncing bank into the low and mid teens. I doubt 16x is the right level for "fairly valued" stocks in the 21st century.
The CAPE 60 year median value is a shade under 20x. That sounds fair to me.
Use a 6 year earnings average instead of a 10 year average
Swedroe doesn't say why he chose to use a 6 year earnings average. He doesn't argue that it's a better measure. He simply says there's nothing special about a 10 year average and goes ahead with this adjustment. If there's not anything special about either 6 or 10, why bother making a change at all? (pst, because it lowers the CAPE value, maybe?)
But there is something special about the 10 year average. It's longer than our typical business cycle so it more likely includes both peak and trough earnings. Six years is too short as evidenced by the fact that today's six year average completely misses the earnings crash of 2008 and 2009.
Using the 6 year average results in a current CAPE of 22.5x and a 60 year median of 18.5x (based on GAAP earnings)
Use Operating Earnings instead of GAAP Earnings
This is a ridiculous adjustment. "Operating earnings" are basically earnings minus all of the bad stuff(i.e. investment writedowns, litigation expense, plant closing expenses, reorganization expense, foreign currency losses, and yes, goodwill impairments, among many, many other things.) Swedroe explains this is a necessary adjustment because of FAS 142 accounting changes to goodwill (
critiqued here).
He repeats again that the change in goodwill accounting results in a 4 point overstatement in CAPE versus periods prior to 2001. But again fails to link to any source for this claim.
After all of this he concludes valuations are about 18% above their mean.
Using only the adjustments that seem reasonable gets you about ~35% overvalued.
Either way. Not cheap.