On August 28, the S&P 500’s price-to-earnings ratio reached a towering reading of nearly 30, the actual number that day was a whisker short at 29.85. Now it’s official: Around 3 PM on Monday, September 22, the big cap index sailed beyond that historic barrier, gaining 32 points or 0.48%, a surge that pushed the multiple over the landmark to 30.09.
Equity analysts and pundits, however, virtually never mentioned that the most prominent index comprising the biggest corporate names was hovering for weeks near 30. You’d typically hear a much more modest, market-friendly number in the low 20s. It’s often hard to tell what metrics the experts are using to get a figure that compressed. It may a reading based on operating profits, or a measure incorporating Wall Street’s forecasts for earnings-per-share four quarters hence.
PEs deploying both of those benchmarks are faulty, and are constantly misrepresented as evidence that stocks are still reasonably priced, and even that multiples continue harboring scope for expansion. The approach that relies on current operating earnings eliminates taxes, interest and other “real money” items to arrive at EPS that’s artificially elevated, since it doesn’t count all the expenses on the income statement. That game swells the denominator, and makes PEs appear falsely subdued.
Multiples tied to analysts’ future estimates of EPS perform the same trick in a different way. Since the Street almost invariably issues forecasts that are highly inflated, and that even the prognosticators themselves don’t buy, that formulation posits usually unachievable earnings numbers going forward that once again, provide the illusion of friendly investor-cheering valuations.
But the only PE that matters is the one that that includes all the expenses, and counts only the official profits already in the books. It’s today’s S&P 500 index price divided by the companies’ GAAP net earnings posted over the most recent four quarters. S&P reports that with over 99% of all Q2 2025 EPS now collected, EPS over the trailing year equals $222.55. Hence, the S&P that started September at 6664 and a multiple of 29.94 by just after 3 pm had reached 6696 to hit 30.09.
For investors just entering the market, a PE of 30 is an extremely bad place to start
A PE of 30 means big caps stocks are really, really expensive by historical standards. It also signals that from these heights, the chance for big returns going forward over any extended period are low, and the risks of a sharp “reversion to the mean” downdraft is far more likely. In the last quarter century-plus, the S&P PE has only been higher on one occasion that counts. It exceeded 30 for 10 quarters from late 1998 to the close of 2002 during the Dot Com craze. It then took stocks seven years to regain the highs reached in the frenzy. (PEs also exceeded 30 during the Global Financial Crisis and COVID pandemic but only because earnings totally collapsed, skewing the data.) In no other time since 1888 did the PE at the end of any quarter exceed 30. Just prior to the market crash in 1929, it hit 20, and the month before the 1987 meltdown the S&P multiple reached 21.
The market math is flashing red
A good proxy for the S&P 500 total return going forward is the earnings yield. It’s the inverse of the PE or the cents you’re getting in dividends, buybacks and retained earnings for each dollar you plow into shares. At a 30 PE, that’s 3.3%. Add expected annual inflation over the next decade of 2.39%, and you get a projected annual return of 5.7%. Doesn’t sound bad. But equities, as Warren Buffett stresses, compete with bonds, and the bigger their edge over super-safe treasuries, the better their returns tend to be. With the 10-year yielding 4.15%, stocks are giving you a premium of just 1.55 points. That’s super narrow compared to what equity investors generally command to shoulder the substantial risk of owning equities. As recently as December of 2019, when the Treasuries yielded 1.8% and the PE was a cheaper 24, stocks enjoyed a much bigger 2.5 point cushion.
And look at what happens if over the next five years, the PE drops from 30 to 25, a number that’s still well above the long-term norm. That big drop would cut your total return to a piddling 12% or roughly 2% a year.
In the case of the stock market, past performance pretty much guarantees future returns. When stocks soar, sending PEs skywards, and especially when the comfort of Treasuries beckons at the same time, you can pretty much count on a tough slog ahead.
