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Stock Market Valuation
The forward price-to-earnings (PE)
ratio is a valuation metric designed
to help investors answer a relatively
simple, but important, question: How
much am I paying for the next
twelve months of earnings? Higher
ratios indicate that stocks are more
expensive on a valuation basis.
Based on this metric, large cap US
stocks are currently much pricier
than their smaller counterparts. PEs
fell sharply in March but stabilized in
April before climbing sharply in the
third quarter. Strong earnings have
helped slightly ease large cap
valuations lately, though. High
valuations can create less room for
companies to err without damaging
share prices, but valuations have
historically been a poor market-
timing tool.
Source: Bloomberg; Envestnet Quantitative Research Group (QRG).
0
5
10
15
20
25
30
35
40
9/2010 9/2015 9/2020 9/2025
S&P 500 Forward PE Ratio
S&P 600 Small Cap Forward PE Ratio
S&P 500 Historical Average
S&P 600 Historical Average
S&P 500
15-Year
Average
17.2x
S&P 600
15-Year
Average
18.4x
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