The Big Question: Is the P/E Ratio a Reliable Metric for Investors Today?

Since the dawn of investing, people have used price-to-earnings (P/E) ratios as a key metric to determine whether the stock markets and individual companies are under- or overvalued.

The ratio is often a great starting point when deciding whether an investment is worth looking into. If a stock trades at a lower multiple than the overall market, its peers or its past performance, then that could mean its stock price has room to grow. A higher multiple could be seen as a sign that the company is overvalued – or too expensive – and could fall hard if it misses earnings estimates or received other bad news.

Recently, some experts have questioned whether P/E is still worth considering. Why? In part because several tech companies have high P/E ratios, which can make it hard to determine their true value. The overall market is also trading at higher multiples than it has historically and yet its value continues to climb. Here we attempt to answer the big question: What is the P/E ratio, and does it matter anymore?

What is P/E?

First, let's look at what the price-to-earnings (P/E) ratio is and what it tells us. Simply put, the P/E ratio is a valuation metric that compares a company's share price with its earnings. It's calculated by dividing a company's current share price by its earnings per share (EPS). For example, if a stock trades at $60 per share and the company earns $5 per share over the past 12 months, its P/E ratio is 12 ($60 ÷ $5). In other words, investors are paying $12 for every $1 of the company's annual earnings. You can also use the same metric to value an entire market, like the S&P 500.

On its own, that number doesn’t tell you much, but it can come in handy when you compare it with other companies or markets. If that company is trading at 12x P/E, but its peers are trading at 10x P/E, then it could be argued that the company is overvalued. If the market it’s on is trading at 20x P/E, then it could be deduced that the business is less expensive than the overall market.

If that same company is trading at 12x P/E, but typically trades at 15x P/E, then you might say it’s undervalued compared where it trades historically.

P/E works differently for different kinds of businesses. Mature banks, utilities and consumer staples often have fairly stable P/E ranges, whereas fast-growing technology companies can trade at much higher multiples because investors are valuing future growth rather than current earnings.

So, what influences P/E ratios?

There can be many reasons why a P/E ratio fluctuates over time. Interest rates, inflation, economic growth, investor sentiment and expectations for future earnings can all influence how much investors are willing to pay for a stock. When interest rates are low, for example, investors might pay higher P/E multiples because other investments, such as bonds, offer lower returns. Conversely, when interest rates rise, stock valuations might come under pressure as companies’ profits are squeezed by higher borrowing costs, while bonds pay higher returns.

It's also important to know that there are two types of P/E ratios: trailing and forward P/Es. Trailing P/E ratios measure earnings from the previous 12 months. Because this ratio is based on actual reported profits, it reflects what the company has already achieved. The forward P/E ratio uses analysts' estimates of earnings over the next 12 months. This gives investors a view of how expensive a company appears based on expected future performance rather than past results.

Are P/E ratios useful today?

Over the last several years, the effectiveness of the P/E ratio has come into question as more high-flying tech stocks – many of which have lofty P/Es or no P/E at all – have started trading on the market. SpaceX, for instance, doesn’t have a PE ratio because it’s not yet profitable – and you need earnings to have a P/E ratio. So, the metric does not apply in this case. Shopify, on the other hand, is an example of a company that may be considered to have a high P/E. As of August 10, 2026, its P/E was around 104.¹ While that’s lower than its peak of 779 in 2023, it’s well above the broader stock market. (Generally, many tech stocks do have higher ratios – and higher volatility – than the broader market because investors expect their earnings to grow faster.)

As for the S&P 500, it’s trading at above its historical norms – around 25 today versus rolling 10-year average of 20.37 – and it could continue to climb higher if earnings continue to rise.²

Some economists now argue that the P/E ratio has limitations. A recent paper from the Federal Reserve Bank of Minneapolis,³ for instance, suggests that valuations may be better understood through price-to-free-cash-flow (P/FCF), which measures the cash a company generates after funding its operations and capital investments. And even that metric may be in question as tech giants burn through more cash to build out AI infrastructure.⁴ The authors note that the U.S. stock market may be less overvalued than traditional P/E measures suggest, because capital investment has remained relatively modest over the past several decades, allowing more money to flow to company shareholders.

So, what does all of this mean for you?

No single valuation metric tells a company’s whole story, including P/E. The number is often used to help investors figure out if a company might be over- or undervalued. If a company is trading well above the market, is that because it has major growth prospects that it can reasonably achieve? If the answer is yes, then a high P/E ratio may be warranted. If it’s no, then there could be trouble ahead. For instance, if earnings collapse but the stock price stays the same, its P/E will climb. The same goes for a low P/E: If a company is trading below its peers or its historical norm, is that because something has spooked investors, but its prospects are still bright? Or does the company have a problem and its P/E is low because demand for it is low?

To determine the answers to those questions, you’ll need to look at other financial metrics, such as debt ratios, recurring revenues and net profit margin, among others, while also reading press releases and looking at executive statements to see where the company may be headed.

Ultimately, the P/E ratio isn't obsolete; it's simply one tool among many. It can help identify opportunities, raise red flags and provide valuable context, but it can't tell the whole story. Even in today's market, where valuations remain elevated by historical standards, the P/E ratio still has its place. The key isn't whether the number is high or low – it's understanding why it is where it is.