As stock market nears a P/E ratio of 30 - should investors worry?

S&P 500 P/E ratio 2025: The stock market is breaking records again. The S&P 500 had closed at 6,469 on August 14, a new high, but if you look past the headlines and into the details, something doesn’t quite add up, as per a report.

S&P 500 Hits Record High, But Cracks Begin to Show

Despite slowing job growth, tepid GDP numbers, rising inflation, and stubborn interest rates, big-cap stocks keep soaring, according to Fortune. Investors seem to be betting on momentum, artificial intelligence, and hope for rate cuts from the Federal Reserve, as per the report. But beneath the surface, there’s a flashing warning sign: the market’s price-to-earnings ratio has climbed to 29.85, within a whisker of 30, and that should give investors pause, according to the Fortune report.

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Right now, investors are getting just $3.30 in earnings for every $100 they invest in the S&P 500, that’s one of the worst deals just before the dot-com bubble in early 2002, as per the report.

Over the past 25 years, the market’s P/E ratio has only hit 30 a few other times and usually only because profits crashed during major crises like the 2008 financial meltdown or the early days of COVID, according to Fortune. In those cases, earnings dropped so much that it temporarily made stocks look more expensive than they really were, as per the report. But this is the first time the P/E has reached within a whisker of 30 since what’s renowned as one of the most-unhinged times in the annals of financial markets, as reported by Fortune.

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While the P/E reached 30 only during just one period between 1888, where the data begins, and also during the start of the dotcom takeoff in 1998, according to the report. It also occurred in 1929, shortly prior to the wipeout ushering in the Great Depression, reported Fortune.

The troubling factor is the way the multiple reached its current heights as the main driver was not rising profits, according to the report. Since the pre-COVID end of 2019, EPS for the S&P 500 rose by 67% or 9% annually, while the index has waxed far faster at 120%, or 14% a year, as reported by Fortune. The outlet wrote, "It’s those divergent, sprint versus jogging performances that hiked the P/E from 22 to 30."

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Rising Bond Yields Challenge Stock Market Appeal

Billioanire investor Warren Buffett often points out that stocks and bonds are competing for investors’ money, and usually, when interest rates fall, stocks get a boost, according to the report. But over the past couple of years, the opposite is happening, where bond yields, which had been stuck near historic lows, have jumped back to more normal levels, reported Fortune. The 10-year Treasury yield, for example, was just 2.2% on average from 2015 through early 2022, but now it’s around 4.3%, making bonds a much more attractive option than before, as per the report.

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Future Returns on Stocks Expected to Shrink

At the same time, the earnings yield on stocks, the $3.30 you get for every $100 invested has actually dropped, according to the report. A good way to estimate future stock returns is to look at the earnings yield, which currently stands at about 3.3%, as per Fortune. If inflation stays around 2.5%, which means companies can raise prices and profits at that pace, one might expect total returns of about 5.8% per year, as reported by Fortune. That includes the roughly 1.2% dividend yield investors get from stocks. But that small dividend is a sign of how pricey stocks have become, according to the report.

FAQs

Has the P/E ratio ever been this high before?
Only a few times, during the dot-com bubble, the Great Depression, and brief periods of crisis like COVID and 2008.

What is the earnings yield on stocks right now?
Just 3.3%, meaning you earn $3.30 for every $100 invested.