P/E Ratios: How High Can We Go?

It’s time to look away from the S&P 500 if you have a fear of heights.

In recent months, the index’s P/E ratio has climbed to heights we haven’t seen since the dot-com era — where valuations get thin, and oxygen gets scarce.

It’s no surprise, then, that many investors are asking the same question: Are we approaching a summit… or the edge of a cliff? Before we answer that, let’s slow our pace and take stock of the basics: what a P/E ratio actually is, how it’s calculated, and what this particular gauge might be telling us about whether the market is preparing for another push upward—or a not-so-graceful descent.

How is the P/E Ratio calculated?

The P/E ratio, or price-to-earnings ratio, essentially measures a company’s stock price compared to its earnings per share (EPS).

The P/E ratio is calculated by dividing its stock price by its EPS.

• The stock price reflects what the market is currently willing to pay for a share in the company.
• The EPS is the calculation of the company’s earnings, or its net income, divided by its total number of diluted shares outstanding, over a certain period.

Put together, the P/E ratio allows us to gauge whether the market price is an accurate reflection of the company’s recent earnings. A higher P/E ratio means higher investor expectations, and when the P/E ratio is too high, it’s a sign that expectations are possibly inflated.

Here’s an example to illustrate this:
Let’s say Company A’s shares are going for $1, and its total earnings divided by its outstanding shares is also $1/share. The company’s P/E ratio is 1. In plain English, you’re paying one dollar for every dollar the company earned over the past year — a simple, almost too-neat one-to-one relationship.

Now, let’s look at Company B. This company made the same recent earnings and has the same EPS as Company A. However, investors believe Company B has a much greater future trajectory. They price the company’s stock at $3, based on expectations that earnings will grow faster in the future. This, therefore, results in Company B having a higher P/E ratio of 3. 

P/E ratios are particularly useful to compare similar companies (i.e., companies in the same industry) to help determine whether a company may be overvalued or undervalued. It’s one of several market multiples that help to provide a sanity check on a company’s valuation. That’s important, especially because a company’s valuation can easily be inflated by factors that don’t reflect solid financials, such as hype and well-made slide decks.

The P/E Ratio: Tried & True

During the dot-com era, when many companies had neither earnings nor a credible path to them, an entire cottage industry of improvised metrics sprang to life. “Eyeballs,” “clicks,” “engagement minutes” — if it made a sky-high valuation look slightly less delusional, it became a metric. Markets tend to do this: ratios appear, disappear, and occasionally resurface under new branding, each claiming to capture value better than the last. 

The P/E ratio is far from perfect, but unlike those fleeting inventions, it’s endured. It remains a simple, durable, and time-tested way to anchor valuations when the market gets a little too creative for its own good.

Zooming out: The S&P 500’s P/E Ratio

The S&P 500 P/E ratio is a measure of the current market price of S&P 500 stocks, divided by their EPS for the most recent 12 months.1

On September 22, many were alarmed to see this ratio surge past 30. As of yesterday, the number sits at 30.87.

That means that investors have been pricing S&P 500 companies at over 30 times their latest earnings. To put it mildly, those are some very optimistic expectations. 

Why the concern now? 

Historically, the S&P 500’s trailing P/E ratio has crossed above 30 only during periods of extreme earnings distortion — Global Financial Crisis (i.e., 2007-2009), the COVID shock, and several earlier recessions where profits fell faster than prices. Those spikes tell you more about collapsing earnings than euphoric markets.

When you exclude those distortion years and focus instead on valuation-driven peaks, the only true ‘high P/E’ era comparable to today was the dot-com era.

What’s driving this trend?

It all comes down to AI and tech. The largest companies on the S&P 500 are investing billions of dollars to enhance their AI capabilities, turbocharging investor enthusiasm.  

The gains driven by AI are hard to ignore. The release of ChatGPT sparked the beginning of an AI revolution three years ago, and since then, the S&P 500 has grown by 64%. In fact, the seven most valuable companies on the S&P 500, all the largest players in AI and tech, account for nearly half of the benchmark’s gains. 

Today, the Magnificent Seven accounts for 35% of the entire S&P 500. For comparison, in 2000, the top seven companies accounted for only 15% of the index.

Investors aren’t just putting most of their eggs in the Big Tech basket — they’re putting the entire grocery store in there as well. In other words, this isn’t just a market rally: it’s an AI-powered concentration experiment. A handful of tech giants are now carrying more weight than at any point in modern market history, and investors seem perfectly content to let them do the heavy lifting.

Maybe that’s justified. Maybe it isn’t. But when seven companies make up more than a third of the index and nearly half its gains, you don’t need a Ph.D. in finance to see the imbalance. Whether this ends in a triumphant march higher or a collective wince later on, one thing is clear: the market’s fate is increasingly tied to a very small group of very large companies.

Should we be concerned about high P/E ratios?

You’ve probably heard or seen growing calls of an AI bubble, from news headlines to LinkedIn posts, to your uncle at Thanksgiving. 

Looking at the overall P/E ratio for the S&P 500 certainly draws comparisons to the dot-com bubble. 

But it’s worth noting that the P/E ratios of the largest companies are still far from those of tech companies from 2000. As of October 2025, Nvidia, Microsoft, and Apple had P/E ratios of 55, 38, and 36, respectively. During the dot-com bubble peak, the unweighted average P/E ratio for the seven biggest tech companies was 276.

The current AI boom is also a fundamentally different beast from the dot-com bubble. It’s actually making money, for starters.

It’s a point that Federal Reserve Chair Jerome Powell made back in October, when he explained that businesses during the dot-com era had rushed to achieve high valuations, but many ultimately went bankrupt due to massive losses.

These businesses had valuations based on expected earnings, but few were actually generating any revenue, and the bulk of their investments were funded by debt. 

In contrast, much of the investor optimism we’re seeing today is justified by companies delivering higher profitability and expected growth. 

Just look at Nvidia’s Q3 earnings report last month, which recorded $57 billion in revenue, up 62% year on year and beating Wall Street expectations.

According to Bloomberg, 95% of S&P 500 companies are expected to grow earnings next year by an average of 16%, and the eight biggest companies on the S&P 500 (the Magnificent Seven and Broadcom) are expected to drive 21% profit growth next year. There is real revenue fueling growth here, unlike the unprofitable internet startups of the dot-com bubble.

The Accelerating Rise of AI

Another consideration is that the S&P 500’s trailing P/E ratio may seem unreasonably high because earnings for the largest companies are growing at an unprecedented rate, accelerated by AI. 

And that’s really the hinge of the whole discussion. In a market increasingly driven by AI and by the conviction that future profits will more than make up for today’s sticker prices, the standard, backward-looking P/E ratio only gets you halfway there. Investors are now paying for what these companies might earn once all those billions poured into AI finally start to show up in the numbers. That’s why the forward P/E matters: it stacks today’s prices against tomorrow’s projected earnings. And in a market running this hard on hope, those projections aren’t just another data point. They’re doing the heavy lifting. Bloomberg analysis on the S&P 500’s blended forward P/E ratio, which is a weighted average of recent and future earnings, has found that the ratio is largely skewed by a small group of expensive and highly speculative companies. 

In a traditional, market-cap-weighted index, giants like Nvidia have an outsized influence on the final number. But if you rerun the math using an equal-weighted S&P 500 — where every company counts the same, whether it’s Nvidia or Walmart — the forward P/E drops to 17.8. That’s barely above its 10-year average and tells a much calmer story. 

Put differently: when every company gets the same voting power, instead of letting the giants dominate the calculation, the market suddenly looks far less stretched. All of this paints a more nuanced picture. Yes, valuations are elevated, but they’re also supported by strong earnings growth and concentrated among a few tech companies. 

Some experts (not Metallica) have said that as long as their growth isn’t jeopardized, “nothing else really matters.” Which leads us to the next question…

What are the chances that growth is jeopardized?

There is a very real concern that the growth of Big Tech is currently being fuelled by a complex wave of circular deals. It’s a point we’ve explored in our past newsletter here. Some experts have lauded the creative approach taken by companies like OpenAI to pay for their computing needs. Others are concerned that too much is now resting on the advancement of AI. If OpenAI doesn’t deliver on its AI promises, it would send ripples across all the major tech players. 

There are also plenty of skeptics who believe that Big Tech may be overstating its numbers.

One of them is Michael Burry, the investor made famous in The Big Short for predicting the US housing market’s collapse before the 2008 Global Financial Crisis. He recently questioned how much of Big Tech’s earnings have been inflated by lengthening the depreciation schedules of computing equipment. 

When chipmakers like Nvidia release new chips at an ever-increasing rate, Burry argues, depreciation should accelerate rather than lengthen. 

And yet, earlier this year, Meta extended the life period for certain servers and networking assets from 4-5 years to 5.5 years. It’s a small accounting change that has allowed the company to reduce its 2025 depreciation expense by the tiny sum of $2.9 billion. Yep, just a multi-billion-dollar rounding trick for the books. 

When so much of the market’s performance is concentrated in so few companies, even minor earnings misses from one of these companies could ripple across the entire index.

So, how high is too high?

In the end, today’s elevated P/E ratios are less a verdict and more a reminder: the market is placing enormous faith in a very small group of very large companies. That faith may be justified; AI is real, the earnings are real, and the growth has been nothing short of remarkable. But concentration cuts both ways. When a handful of companies are doing this much of the heavy lifting, even a small stumble can shake the entire structure.

So how high is too high? We’re about to find out. The next few quarters will tell us whether these companies can keep outrunning the expectations baked into their valuations, or whether the market has allowed enthusiasm to get a few steps ahead of reality. Either way, this is no longer a story about the entire S&P 500 — it’s a story about whether the biggest players in the index can keep carrying the rest of the field. And that’s a test we haven’t seen at this scale before.

Endnotes:

1. One variant of the P/E ratio is the Shiller P/E ratio, also known as the cyclically adjusted price-to-earnings ratio (or CAPE). 

This ratio is calculated by the current price of the S&P 500 divided by the average of earnings over the past 10 years, adjusted for inflation. 

It eliminates any short-term fluctuations caused by variations in profit margins during business cycles. This means that it gives a better indication of whether the market is truly overvalued or undervalued. 

The Shiller P/E ratio is currently over 40. That’s the highest it’s been since the dot-com bubble. In 2000, the S&P’s Shiller P/E ratio had spiked to 44 before the S&P 500 crashed 49% between March 2000 and October 2002. 

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.

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