The PE Ratio Myth: Why "Expensive" Doesn't Mean What It Used ToS&P 500SP:SPXHenriqueCentieiroUsing the PE ratio of the stock market (S&P 500) is no longer a reliable metric to understand whether the markets are expensive or not. Looking at historical PE, we're not comparing apples to apples. In a recent interview, Paul Tudor Jones said the stock market could revert to the 25–30-year PE average, and that this would be a 30–35% decline. The reason this is misleading is that he is looking at the market through a Boomer lens. Check the chart below, where I plotted the S&P 500's PE ratio over time (in blue), and the different technological revolutions. The stock market can have a high PE ratio and still continue to perform well over the coming years. A high PE ratio is not a sign of "being expensive" but rather an indicator of future expectations. Remember: the stock market prices in future expectations - not what the market is doing right now. A high PE might show that the market is "expensive" or "cheap" relative to past prices, but it says very little about future returns. Did you know the PE has been above average since 1994? Imagine guiding your investment decisions just by looking at PE ratios. Here are eight simple reasons why PE ratios will never come down to historical levels: The number of investors in the market is now much larger. Everyone is buying stocks through their 401(k)s and retirement plans. Technological innovation is compounding. Better tech = more efficiency = lower costs = higher earnings = higher PE. Every time we have a new innovation cycle, it pushes PE ratios up - and now we have AI, robotics, and a ton of automation. The top companies 30 years ago were industrials and oil companies - capital-intensive with low scalability, which meant lower PEs. Today's top companies are software, automation, and AI companies. They grow much faster and generate much higher earnings. Companies back then required heavy investment in tangible goods and factories. Today, less capital is tied up in factories, which means higher returns on invested capital - and investors pay more per dollar of earnings. Stock buybacks: companies now prefer buybacks over dividends, which pushes stock prices up and inflates PE ratios. Companies are now much more global and earn revenue all over the world. We live in a low-interest-rate world. Lower discount rates (risk-free rates) mathematically justify higher valuations. So… yeah. I always take these metrics with a grain of salt - and I always listen to the "experts" with an even bigger grain of salt. - Henrique Centieiro