In departing from the standard trailing P/E, the CAPE does have a point: One year of earnings might not be representative because it is affected by transitory, one-time items, sometimes called the Molodovsky Effect on the trailing P/E, named after a one-time editor of the Financial Analysts Journal. A low P/E could be due to a one-time gain from as asset sale, for example, and a high P/E could be due to a one-time charge like an impairment write-off. These one-time items (that do not repeat in the future) cannot be the basis for growth. So the trailing P/E might not be a good indicator of potential earnings growth.
The Molodovsky Effect has been accentuated in recent years by new accounting standards that include price fluctuations in investments accounted for at fair value. But there is a remedy: Denominate the P/E ratio in sustainable earnings that remove these effects. Chapter 7 takes you there.