S&P 500: Price-to-Earnings

In January we kicked off the year writing about where the market was trading on a relative basis as measured by the Price-to-Earnings ratio (P/E). Let’s bring this conversation back and see where things stand as we head into the second half of the year.

The first chart is from FactSet, which shows the forward 12-month Price-to-Earnings ratio for the S&P 500 is 22. The 5-year average is ~20 and the 10-year average is 18.4.

S&P 500 Forward 12-Month Price-to-Earnings (P/E) Ratio over 10 years showing recent V-shaped recovery, with current P/E at 22 versus 5-year average of 20 and 10-year average of 18.4 – Source: FactSet”

Notice the three highlighted areas to the right that make a perfect V-shape. The left side of the V was in January. The bottom was in April, and the far right is where we currently sit. You likely remember the tariff related selloff that bottomed in April. This is why you see the dip all the way down to about 18 because the price of the S&P 500 fell nearly 20% and subsequently lowered the P/E ratio. Since then, we have returned to where we were in January.

Let’s turn to a chart from UBS of the Shiller P/E, also known as the cyclically adjusted P/E ratio (CAPE). The CAPE adjusts earnings-per-share over 10-year periods thereby smoothing out fundamentals over various economic cycles and providing an alternative look at relative valuation. Currently, we’re at 37.8x earnings, which sits in the 98th percentile going back to 1925.

Historical chart of the S&P 500 Shiller P/E ratio from 1925 to 2025, showing current level at 37.8x earnings in the 98th percentile – Source: UBS, Bloomberg, Shiller Database

Relative valuation metrics are not timing signals. The market also does not have to dramatically fall just because the P/E ratio is high, or because the price level is trending higher to all-time highs. If we ignore some of the structural factors that impact market price, the high P/E ratio simply tells us investors are willing to “pay-up” as they believe the environment is still ripe for future profitability and earnings growth. In other words, investors are optimistic or have a high conviction that today’s price for the claim on future cash flows is too low.

We’ll close as we did in January. U.S. equity market valuations look stretched on a historical basis. Notwithstanding, we believe that maintaining a well-diversified portfolio, an eye towards risk management and a long-term mindset to capitalize on opportunities will continue to position investors for success. However, don’t be surprised if the market cools off and digests a bit from these valuation levels as we head into late summer and fall seasonality patterns. August through October have been known to deliver bouts of downside volatility with September being the most egregious offender, boasting an average change of negative 1.13% dating back to 1925 according to Yardeni Research.