The price-to-earnings ratio is the most commonly cited valuation metric in investing — and also one of the most commonly misused when read without context.
The Formula and Current Context
P/E ratio = share price ÷ earnings per share. It expresses how much investors are real-time paying for each dollar of a company's actual earnings. As of August 2026, the S&P 500's trailing P/E ratio stood at roughly 26.09 — modestly above its long-term historical average, reflecting a market pricing in continued earnings growth. A high P/E isn't automatically "expensive" and a low P/E isn't automatically "cheap" — both only mean something relative to a company's own growth rate, its industry peers, and its own historical range.
Worth knowing: The PEG ratio (P/E divided by expected earnings growth rate) is a useful next step beyond raw P/E — it accounts for the fact that a fast-growing company deserves a structurally higher P/E than a slow-growing one, so comparing raw P/E alone across companies with different growth rates is a common, avoidable mistake.
Someone Seeing a "High" P/E and Assuming Overvaluation: Check the expected earnings growth rate first — a high P/E paired with high growth may be reasonably priced.
Someone Comparing P/E Across Different Industries: Compare within the same industry — average P/E varies structurally by sector (growth tech vs. mature utilities, for example).
Use P/E the Way
- Compare a company's P/E against its own industry peers, not the broad market alone.
- Check the PEG ratio to account for growth differences.
- Look at a company's historical P/E range for additional context.
See EPS explained and price-to-book ratio explained for related valuation tools.
