A few weeks ago as the S&P 500 hit a new record, this reporter noted that the index virtually hit a landmark reading, a price to earnings ratio of 30. I actually cheated a bit, as I pointed out in the piece: The actual figure was around 29.85, close enough that I rounded it to 30. The point then was, this is a big, big number that you seldom see mentioned by Wall Street analysts or pundits, who’d rather cite a lower, more marketable multiple based on “next year’s” (always over-estimated) profits or “operating earnings” that exclude real charges as basic as interest expense.
But now it’s in the record books: At 2:35 PM on August 28, the S&P hit another fresh summit at 6501, and the real, not-rounded-up PE hit 30. That ratio’s based on what matters most, GAAP earnings posted over the last four quarters, profits that really happened as opposed to usually over-rosy predictions. The only span in recent decades when big cap stocks have been this expensive: Ten quarters during the tech frenzy that stretched from Q4 of 1999 to Q1 of 2022. (The PE also briefly exceeded 30 during the pandemic and following the GFC, but only because earnings collapsed, sinking the denominator and skewing the multiple artificially low.)
As I noted, on the macro scene, the danger signs are multiplying. The latest employment report from the Bureau of Labor Statistics disclosed that the U.S. added a meager 73,000 jobs in July, and revised the May and June figures radically downward, bringing total net hires for the past three months to just 106,000, less than one fourth the increase for the same period last year. Heather Long, chief economist at Navy Federal Credit Union, described the feeble data as a “game changer” demonstrating that “the labor market is deteriorating quickly.”
GDP growth has also proved disappointing, clocking far below the Trump administration’s highly aspirational target of 3%. The economy expanded at an annualized clip of just 1.75% through the first half of 2025, way down from the 2.7% average in Q3 and Q4 of last year. The Congressional Budget Office (CBO) is forecasting tepid expansion of 1.7% to 1.8% from 2026 to 2035, not nearly fast enough to shrink the federal debt that the agency projects will swell from 100% of national income this year to 110% by 2031.
So what does that mean for investors now? A 30 PE means you’re getting only $3 in earnings for every $100 you pay for S&P stocks. As recently as late 2022, you were getting $5 for every $100 invested. And the jump in stock prices didn’t occur because earnings soared. Since then, they’ve barely matched inflation. No, the huge ramp in recent years came strictly because PEs jumped, making stocks more and more expensive. That doesn’t mean stocks will crash tomorrow, or next week or next month. But history has proved time and time again that when valuations rise this far into the stratosphere, they are bound to come back to earth eventually.
This story was originally featured on Fortune.com
