Atlas Macro

Markets

P/E Ratio (Price-to-Earnings)

Stock price divided by annual earnings per share. Low P/E = cheap relative to earnings; high P/E = expensive or high growth expected.

Key points

  • S&P 500 long-run average about 16x past earnings; about 25x forward earnings at the 2000 peak and about 10x at the 2009 low.
  • Tends to fall when real yields rise.
  • Best read alongside growth, profit margins and the macro backdrop.

Example

If an index trades on 22x forward earnings and real yields rise sharply, investors may only pay 19-20x, a fall in price even if earnings forecasts don't change.

In history

Many fast-growing technology companies traded above 50 times earnings in 2021, when rates were near zero. As real yields rose in 2022, many of those multiples halved.

Related terms