The Most Misleading Number in Investing
Editor's note: Taken at face value, plenty of investing metrics can be misleading...
In almost every bull market, investors eventually become concerned that stocks are overvalued. That's why most folks monitor one key metric regarding whether a stock is expensive or not.
But according to Joe Austin – senior analyst for our corporate affiliate Chaikin Analytics – this number doesn't always tell the full story...
In today's Masters Series, originally from the December 19 issue of the Chaikin PowerFeed daily e-letter, Joe details how this metric can be misleading...
The Most Misleading Number in Investing
When the market is up, people start to worry about valuations...
And one of the most popular metrics is the price-to-earnings (P/E) ratio.
The calculation is simple. Divide the price of a stock by its earnings per share.
Right now, the S&P 500 Index trades at a trailing 12-month P/E ratio of more than 30 times. Historically, that's high.
Here's what the P/E ratio for U.S. stocks looks like on a longer-term basis...
"Bears" often cite high P/E ratios as a reason for caution...
Federal Reserve Chair Jerome Powell recently got on this bandwagon. Last September, he sent the market tumbling by noting in a speech that "equity prices are fairly highly valued."
But it's not so cut-and-dried on how important the P/E ratio is...
I've talked with my colleague and Chaikin Analytics founder Marc Chaikin for his take on the importance of the P/E ratio – particularly its role in determining Power Gauge ratings.
Marc said that in the 1980s and 1990s, P/E ratios were highly relevant in identifying attractive stocks. Price-to-sales (P/S) ratios later took priority... then yielded to earnings growth and momentum.
Today, the Power Gauge uses the projected P/E ratio within the Earnings category of a stock's ratings. And it ranks that on a relative basis versus other stocks.
If the projected P/E ratio drifts upward, that isn't automatically a bad sign. What matters is how the ratio ranks versus other stocks – not the absolute number.
Of course, people love to talk about P/E ratios. And the usual inference is that a high P/E ratio is bad... and that a low P/E ratio is good.
But that doesn't always hold true in practice. Let's look at a few examples...
First is athletic apparel company Lululemon Athletica (LULU)...
As a brand, Lululemon is a massive success.
The company's clothes are everywhere. And folks love them...
When asked if they considered themselves loyal customers, 83% of Lululemon's customers said "yes."
And 8 out of every 10 Lululemon customers join the company's membership program. As of 2024, that program had 22 million members.
To an investor, that looks like a formidable competitive moat.
And heading into that year, Lululemon's stock looked attractive based on its historical P/E range...
As you can see, its P/E ratio had dropped from almost 90 times to around 64 times. Investors might have thought they were getting a bargain.
But consider how Lululemon's stock ended up performing...
It fell by about 25% in 2024. And it dropped roughly 46% last year.
As it turns out, Lululemon's products had become stale and predictable – particularly in its core U.S. market, where sales were declining.
And buying the stock just because its P/E ratio looked cheap would have lost you a lot of money.
A different example is Big Pharma firm Eli Lilly (LLY)...
Lilly's Zepbound and Mounjaro weight-loss drugs generated $10.1 billion in the third quarter of 2025 alone. This made tirzepatide – the drug behind Zepbound and Mounjaro – the world's bestselling drug. Lilly now controls about 58% of the obesity drug market.
But Lilly looked expensive in January 2024. Its P/E ratio had more than tripled – from less than 30 times to more than 100 times. A skeptic could say you were paying way too much for the stock.
Take a look at this chart...
Since then, Lilly has soared. The stock jumped by about 32% in 2024. And it surged nearly 40% in 2025.
These examples reveal something important...
A low P/E ratio doesn't guarantee a good investment. And a high P/E ratio doesn't mean you should automatically avoid a stock.
Business quality and growth potential matter more than one simple valuation metric.
And then there are cyclical stocks – think automakers, homebuilders, and industrial companies.
Cyclical stocks flip that "low P/E ratio" versus "high P/E ratio" logic on its head.
Cyclical stocks often look cheapest (with a low P/E ratio) at the worst possible time to buy. That's usually right before earnings collapse.
And the opposite is also true...
Cyclical stocks often look most expensive (with a high P/E ratio) at the best time to buy. That's when earnings have hit bottom and are about to rebound.
True, the S&P 500's valuation of more than 30 times trailing 12-month earnings is high. But P/E ratios alone don't determine investment success.
A stock with a low P/E ratio can still be a terrible investment if the business is deteriorating. Meanwhile, a high P/E ratio can be a powerful signal of a company's growth prospects.
So when people worry about the market's high P/E ratio, remember that the number itself doesn't tell the whole story.
In investing, what really matters is finding quality businesses with strong fundamentals and growth potential.
Good investing,
Joe Austin
Editor's note: Since 1950, a strange January market signal has predicted the U.S. stock market's year ahead with 100% accuracy. And now, Chaikin Analytics founder Marc Chaikin says it could be triggering again right now...
That's why he recently went on camera to reveal the move you must make immediately if you have any money in the market. Plus, he shared two free stock recommendations to help you capitalize on this unique setup.