The author actually finds that the Shiller CAPE overestimates the amount of the overvaluation of the current market for a few reasons. But that the market is still significantly overvalued by that amended measure.
"As you can see, the deviation between the two measures comes out to be much smaller. Normalized to the same historical average, the current value of the Total Return EPS (Fair Value) CAPE ends up being 25.9, versus 27.5 for the original Shiller CAPE. The difference between the total return and the original measures comes out at 5.7%, a little over 100 current S&P points (versus 12% and 250 points earlier).
Surprisingly, then, properly reinvesting the dividends at the same valuation across history more than cuts the deviation in half, to the point where it can almost be ignored. As far as the CAPE is concerned, when it comes to the kinds of changes that have occurred in the dividend payout ratio over the last 144 years, there appears to be little effect on the accuracy of Shiller’s original version. The entire exercise was therefore unnecessary. Admittedly, this was not the result that I was anticipating, and certainly not the result that I was hoping to see. But it is what it is.
It turns out that Shiller was right to reject the dividend payout ratio argument in his famous 2011 debate with Siegel and Bianco:
“Mr. Shiller did his own calculation about the impact of declining dividends on earnings growth and concluded that it is marginal at best, not meriting any adjustment.” — “Is the Market Overvalued?”, Wall Street Journal, April 9th, 2011.
If the subsequent foray into Total Return space caused him to change that view, then he should change it back. He was right to begin with. His critics on that point, myself included, were the ones that were wrong."
