P/E Ratio Explained: Why S&P 500 Valuations Matter
One US carmaker trades at three and a half centuries of its current earnings. At that multiple, you are not buying a business. You are buying a story about one.
S&P 500 P/E ratios, May 2026
Long-run S&P 500 average is roughly 15-17. Source: worldperatio.com.
Key takeaways
The P/E ratio compares a company's share price to its earnings per share and helps investors understand if a stock is expensive or cheap.
A high P/E ratio often suggests strong future growth expectations while a low P/E might indicate the stock is undervalued or the business faces challenges.
The P/E ratio can also be used to evaluate entire market indices like the S&P 500, which serves as a benchmark for the overall US stock market.
For long-term investors, starting valuation is crucial because it influences potential future returns and helps understand where the market is in its cycle.