Glossary · Stocks and markets
P/E ratio
The P/E ratio is a stock’s price divided by its profit per share over a year: how many dollars you pay for each $1 the company earns.
Also called: price-to-earnings ratio, earnings multiple, PE
Price ÷ the last 12 months’ reported earnings, Jun 2026. Average since 1871: 16.2.
Oct 2026. Average since 1881: 17.8.
In plain words
A lemonade stand makes $1,000 profit a year and its owner asks $15,000 for it. You would be paying 15 times its yearly profit: a P/E of 15. If profits stayed flat, it would take 15 years to earn your money back.
For a stock it is the same: the share price (P) divided by earnings per share (E) over the last 12 months. A share at $100 with $5 of earnings per share has a P/E of 20.
For the S&P 500 as a whole the P/E is 25.2 (Jun 2026), against a long-run average of about 16.2 since 1871.
Example
Two companies with the same profit
- Steady Co. earns $5 a share and trades at $75: P/E = 75 ÷ 5 = 15.
- Rocket Inc. also earns $5 a share but trades at $200: P/E = 40. Investors expect its profits to grow fast.
- If Rocket’s profit doubles to $10 in a few years and the price stays at $200, its P/E falls to 20.
- If its profit stays at $5 and investors lose patience, the price could fall to $75 just to match Steady’s P/E: a 62.5% drop.
A high P/E is a bet on growth: fine if the growth arrives, painful if it does not.
One level deeper
A high P/E means investors expect profits to grow fast, or simply that the stock is expensive; a low one means they expect little growth or worry about risk. Comparing P/Es makes sense within one industry, less so across very different businesses.
Flip the ratio and you get the earnings yield, E ÷ P. A P/E of 25.2 is an earnings yield of 4.0%, which you can compare with the yield on a bond.
Earnings swing with the business cycle, and that can make the P/E misleading. In May 2009 the S&P 500’s P/E reached 124: not because stocks were dear, but because profits had collapsed in the financial crisis. That is why Robert Shiller’s CAPE divides the price by ten years of inflation-adjusted earnings; it stands at 40.7 now.
The S&P 500’s P/E since 1881
Two ways to measure how expensive US stocks are. The ordinary P/E spikes when profits collapse, as in 2002, 2009 and 2020; Shiller’s CAPE smooths that out with ten years of earnings.
The numbers behind the chart
| Date | CAPE (10-year earnings) | P/E (12-month earnings) |
|---|---|---|
| Jan 1881 | 18.5 | 12.7 |
| Dec 1890 | 14.4 | 15.9 |
| Dec 1900 | 20.7 | 14.3 |
| Dec 1910 | 13.7 | 12.4 |
| Dec 1920 | 4.8 | 8.5 |
| Dec 1930 | 16.1 | 16.0 |
| Dec 1940 | 13.9 | 10.0 |
| Dec 1950 | 11.3 | 7.0 |
| Dec 1960 | 17.6 | 17.4 |
| Dec 1970 | 15.9 | 17.6 |
| Dec 1980 | 9.4 | 9.0 |
| Dec 1990 | 15.8 | 15.4 |
| Dec 2000 | 37.3 | 26.6 |
| Dec 2010 | 22.4 | 16.1 |
| Dec 2020 | 33.8 | 39.3 |
| Dec 2022 | 28.3 | 22.6 |
| Dec 2023 | 31.4 | 24.4 |
| Dec 2024 | 37.7 | 28.6 |
| Dec 2025 | 39.6 | 28.5 |
| Oct 2026 | 40.7 | — |
Why it matters
It is the most common way to say whether a stock, or a whole market, is cheap or expensive.
Over long periods, starting from a high P/E has tended to mean lower returns over the next decade, and a low one higher returns, though it says almost nothing about the next year.
It turns a share price into something you can compare: $500 for one share means nothing until you know what that share earns.
A common mistake
Myth: A low P/E means a stock is a bargain.
In fact: Sometimes. Often it means investors expect profits to shrink. A company earning $5 a share at a P/E of 6 is no bargain if next year it earns $1. Cheap and unloved are not the same as undervalued.
Questions people ask
What is a good P/E ratio?
There is no single good number. For the S&P 500 the average since 1871 is about 16.2 (the median 15.1); fast-growing companies often trade far above that, slow and risky ones below.
What is the difference between P/E and CAPE?
P/E uses the last 12 months of earnings. CAPE, Robert Shiller’s cyclically adjusted P/E, uses the average of the last ten years, adjusted for inflation, so one good or terrible year does not distort it. Now: P/E 25.2, CAPE 40.7.
What is a forward P/E?
The price divided by the earnings analysts expect over the next 12 months, instead of the last 12. It looks lower when profits are expected to grow, and it is only as good as the forecasts.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- S&P Composite (price, dividends, earnings, CAPE), US consumer prices and the 10-year Treasury rate: Robert J. Shiller, Online Data (shillerdata.com).
- This page explains a term. It is not investment advice.