When the market is up, people start to worry about valuations...
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The Most Misleading Number in Investing
By Joe Austin, senior analyst, Chaikin Analytics
When the market is up, people start to worry about valuations...
And one of the most popular metrics is the price-to-earnings (P/E) ratio.
The calculation is simple. Divide the price of a stock by its earnings per share.
Right now, the S&P 500 Index trades at a trailing 12-month P/E ratio of more than 30 times. Historically, that's high.
Here's what the P/E ratio for U.S. stocks looks like on a longer-term basis...
"Bears" often cite high P/E ratios as a reason for caution...
Federal Reserve Chair Jerome Powell recently got on this bandwagon. Back in September, he sent the market tumbling by noting in a speech that "equity prices are fairly highly valued."
But it's not so cut-and-dry on how important the P/E ratio is...
I talked with my colleague and Chaikin Analytics founder Marc Chaikin for his take on the importance of the P/E ratio – particularly its role in determining Power Gauge ratings.
Marc said that in the 1980s and 1990s, P/E ratios were highly relevant in identifying attractive stocks. Price-to-sales (P/S) ratios later took priority... then yielded to earnings growth and momentum.
Today, the Power Gauge uses the projected P/E ratio within the Earnings category of a stock's ratings. And it ranks that on a relative basis versus other stocks.
If the projected P/E ratio drifts upward, that isn't automatically a bad sign. What matters is how the ratio ranks versus other stocks – not the absolute number.
Of course, people love to talk about P/E ratios. And the usual inference is that a high P/E ratio is bad... and that a low P/E ratio is good.
But that doesn't always hold true in practice. Let's look at a couple of examples...
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Two Vastly Different Moves in the Wake of 'Low' and 'High' P/E Ratios
First is athletic apparel company Lululemon Athletica (LULU)...
As a brand, Lululemon is a massive success.
The company's clothes are everywhere. And folks love them...
When asked if they considered themselves loyal customers, 83% of Lululemon's customers said "yes."
And 8 out of every 10 Lululemon customers join the company's membership program. As of last year, that program had 22 million members.
To an investor, that looks like a formidable competitive moat.
And going into 2024, Lululemon's stock looked attractive based on its historical P/E range...
As you can see, its P/E ratio had dropped from almost 90 times to around 64 times. Investors might have thought they were getting a bargain.
But consider how Lululemon's stock ended up performing...
It fell by about 25% in 2024. And it's down roughly 42% in 2025.
As it turns out, Lululemon's products had become stale and predictable – particularly in its core U.S. market, where sales were declining.
And buying the stock just because its P/E ratio looked cheap would have lost you a lot of money.
A different example is Big Pharma firm Eli Lilly (LLY)...
Lilly's Zepbound and Mounjaro weight-loss drugs generated $10.1 billion in the third quarter of 2025 alone. This made tirzepatide – the drug behind Zepbound and Mounjaro – the world's bestselling drug. Lilly now controls about 58% of the obesity drug market.
But Lilly looked expensive in January 2024. Its P/E ratio had more than tripled – from less than 30 times to more than 100 times. A skeptic could say you were paying way too much for the stock.
Take a look at this chart...
Since then, Lilly has soared. The stock jumped by about 32% in 2024. And it's up roughly 36% in 2025.
These examples reveal something important...
There's More to a Good Investment Than the P/E Ratio
A low P/E ratio doesn't guarantee a good investment. And a high P/E ratio doesn't mean you should automatically avoid a stock.
Business quality and growth potential matter more than one simple valuation metric.
And then there are cyclical stocks – think automakers, homebuilders, and industrial companies.
Cyclical stocks flip that "low P/E ratio" versus "high P/E ratio" logic on its head.
Cyclical stocks often look cheapest (with a low P/E ratio) at the worst possible time to buy. That's usually right before earnings collapse.
And the opposite is also true...
Cyclical stocks often look most expensive (with a high P/E ratio) at the best time to buy. That's when earnings have hit bottom and are about to rebound.
True, the S&P 500's valuation of more than 30 times trailing 12-month earnings is high. But P/E ratios alone don't determine investment success.
A stock with a low P/E ratio can still be a terrible investment if the business is deteriorating. Meanwhile, a high P/E ratio can be a powerful signal of a company's growth prospects.
So when people worry about the market's high P/E ratio, remember that the number itself doesn't tell the whole story.
In investing, what really matters is finding quality businesses with strong fundamentals and growth potential.
Good investing,
Joe Austin Editor's note: The Power Gauge evaluates stocks across 20 individual factors. They include everything from financials to earnings, expert activity, and the technicals behind a stock's price action. And the system distills all that information down into a single rating. These ratings range from "very bearish" to "very bullish."
In short, the Power Gauge identifies opportunities that a simple P/E ratio would miss. And here at Chaikin Analytics, we can use it to find great investments in any market environment.
If you don't already have access to our one-of-a-kind system, you can get it by signing up for Marc Chaikin's Power Gauge Report publication...
As part of a special offer, it includes a full year of access to the Power Gauge – with its ratings and data on more than 5,000 stocks. If you aren't already a Power Gauge Report subscriber, get the details on this special offer here.
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.15%
10
10
10
S&P 500
+0.76%
105
240
152
Nasdaq
+1.45%
22
51
27
Small Caps
+0.59%
691
869
337
Bonds
+0.48%
Information Technology
+1.54%
19
39
10
— According to the Chaikin Power Bar, Small Cap stocks are more Bullish than Large Cap stocks. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Consumer Discretionary
+1.8%
Consumer Staples
+0.49%
Utilities
+0.33%
Health Care
+0.21%
Materials
+0.11%
Communication
-0.29%
Financial
-0.6%
Real Estate
-0.78%
Industrials
-2.03%
Energy
-3.98%
Information Technology
-4.35%
* * * *
Industry Focus
Semiconductor Services
15
20
5
Over the past 6 months, the Semiconductor subsector (XSD) has outperformed the S&P 500 by +16.75%. Its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #6 of 21 subsectors and has moved up 3 slots over the past week.
Top Stocks
MU
Micron Technology, I
DIOD
Diodes Incorporated
INTC
Intel Corporation
* * * *
Top Movers
Gainers
MU
+10.21%
LRCX
+6.27%
SNDK
+6.11%
CEG
+5.89%
APP
+5.67%
Losers
FDS
-7.68%
GNRC
-5.41%
FANG
-4.59%
HPQ
-4.01%
DELL
-3.87%
* * * *
Earnings Report
Earnings Surprises
NKE NIKE, Inc.
Q2
$0.53
Beat by $0.15
FDX FedEx Corporation
Q2
$4.82
Beat by $0.71
ACN Accenture plc
Q1
$3.94
Beat by $0.22
DRI Darden Restaurants, Inc.
Q2
$2.08
Missed by $-0.02
CTAS Cintas Corporation
Q2
$1.21
Beat by $0.01
* * * *
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This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.
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