Atlas Macro

Market Analysis

Equity Valuation: P/E, PEG & Valuation Multiples

Valuation metrics answer: "Is this stock/market expensive or cheap?" P/E ratio is the starting point, but growth rates and interest rates matter. High P/E ≠ overvalued if growth is high.

5 min read · Figures checked October 2026

1. P/E Ratio: The Foundation

P/E tells you how many years of earnings you're paying for. Stock at $100 with $5 EPS = 20x P/E. You're paying 20 years of current earnings.

Forward P/E

Uses next 12 months earnings estimate. More relevant than trailing P/E. In 2024–25 the S&P 500's forward P/E was mostly between 20x and 23x, above its 10-year average of about 18x.

Trailing P/E

Uses last 12 months actual earnings. Backward-looking. Can be misleading during earnings recessions (P/E spikes as E falls).

Historical S&P 500 P/E Levels

  • • 10-14x forward: seen near the lows of 2009 and March 2020
  • • About 16x past earnings: long-run average
  • • 20-23x forward: elevated (2021, 2024–25)
  • • About 25x forward: the dot-com peak of 2000

2. PEG Ratio: Growth-Adjusted Valuation

PEG = P/E ratio ÷ expected annual earnings growth (in %). A share on 20x earnings with profits growing 20% a year has a PEG of 1.0. A common rule of thumb treats around 1 as reasonable and well above 2 as demanding, but it depends heavily on whether the growth forecast is right.

Example: Growth Stock Justification

Stock A: P/E 40x, growth 40% → PEG 1.0
Stock B: P/E 15x, growth 5% → PEG 3.0 (demanding, despite the lower P/E)

Fast-growing companies trade on higher P/Es because investors expect earnings to be much larger in future. If the growth doesn't arrive, the high P/E has further to fall.

3. Price-to-Book (P/B) Ratio

Stock price ÷ book value per share. Book value = assets - liabilities (accounting value). P/B below 1.0 means the market values the company at less than its accounting net worth: either a bargain, or a sign investors doubt the assets are worth what the books say.

  • Tech stocks: High P/B (5-10x) because assets are intangible (brand, IP)
  • Banks: Low P/B (0.8-1.5x) because assets are tangible (loans, cash)
  • Value trap: P/B 0.5x but business losing money (book value eroding)

4. Interest Rates & Valuation

Fed Model: Earnings yield (E/P) vs. 10Y yield. When 10Y rises, fair P/E falls (future cash flows worth less). This is a big part of why shares fell in 2022 even though company earnings held up.

Rate Sensitivity

An illustration: if the 10-year yield rises from 2% to 4%, investors might only pay 16x earnings instead of 20x, a 20% fall in price with no change in profits. This is duration risk for shares, and it hits growth companies hardest.

5. Historical Valuation Extremes

  • March 2009 (Bottom): S&P 500 forward P/E about 10x as earnings collapsed. Over the following decade the index returned roughly 400% including dividends.
  • March 2000 (Bubble): S&P 500 forward P/E about 25x; many technology shares on more than 100x earnings. The S&P 500 then fell 49% over two and a half years, and the Nasdaq 78%.
  • Dec 2018 (Pullback): S&P 500 forward P/E fell to about 14x as rates rose. The Fed paused, and valuations recovered to about 17x by mid-2019.
  • 2021 (Frothy): S&P 500 forward P/E about 22x, Nasdaq-100 about 30x. Supported by near-zero rates, and vulnerable once the Fed started raising them in 2022.

How Professionals Read Valuations

  • S&P 500 P/E above 22x: Investors are paying a lot for each dollar of earnings, so prices depend more on growth continuing. Expensive markets have historically been more exposed to falling valuations.
  • S&P 500 P/E below 14x: Historically uncommon, and usually seen during periods of fear such as 2009 and 2011.
  • Rising 10Y yields with a high P/E: A double pressure on shares. Higher yields lower the present value of future earnings, and high valuations leave less room for disappointment.
  • Growth stocks with a PEG above 2.0: Prices assume a lot of future growth, so earnings misses tend to hit them hard.
  • Price-to-book below 1.0 with positive earnings growth: The market values the company below its accounting net worth, which is what "deep value" investors look for.

Bottom Line

The pattern: P/E and PEG work best together. A high P/E can be reasonable if growth justifies it. When valuations are high and bond yields are rising at the same time, shares have historically been most vulnerable to a fall in valuations. Valuation tells you how much is already priced in, not when prices will turn.

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Educational content only. It describes how markets have behaved in the past and is not investment advice.

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