Why All Three P/E Measures Are Flashing Red

Shah Gilani|September 26, 2025

When we talk about P/E ratios and whether stocks are cheap or expensive, measurements matter.

Most investors think they understand the P/E ratio – price divided by earnings.

That confidence is the problem.

Two “standard” P/E measures exist, and while both divide price by earnings, they calculate earnings differently. Trailing 12-month earnings use actual earnings over the past 12 months. Forward earnings use analyst consensus estimates for the coming 12 months.

We rarely hear which measure someone references when they cite a P/E ratio – a critical omission that clouds market analysis.

Why I Prefer Trailing Earnings (But Watch Forward Too)

I favor P/Es based on trailing earnings because they reflect real earnings – what a company actually earned over the past 12 months. Trailing P/Es reveal how valuations shift based on concrete results. Forward earnings make sense for gauging valuations against prospective performance, but they’re guesses. I consider them, but always through the lens of trailing P/Es.

Enter the Shiller P/E: A Decade-Long View

The Shiller P/E (also called the cyclically adjusted P/E ratio, or CAPE) takes a different approach. Instead of using one year’s earnings – trailing or forward – CAPE averages inflation-adjusted real earnings over the past 10 years to smooth out cyclical swings.

Nobel Laureate Robert Shiller popularized this measure to reduce noise from economic booms and busts. The benefit is stability and less sensitivity to short-term distortions – a more structural view of valuation. The cost is lag.

When structural changes in profitability, interest rates, or risk regimes occur, the Shiller P/E may understate or overstate value until the new regime filters into the 10-year average.

CAPE rarely enters mainstream conversation – until valuation concerns emerge.

The Sharp Versus the Smooth

The standard P/E shows what the market pays today for recent or expected earnings. The Shiller P/E shows what the market pays relative to a long-term, smoothed earnings baseline. One is sharp, reactive, short-term. The other is tempered, historical, slow-moving.

When I assess whether the market is overvalued, I examine all lenses and ask: Is the standard P/E exuberant relative to history? Is the Shiller P/E structurally elevated relative to its long-run norm? And critically, how far above that norm?

What the Numbers Tell Us Now

FactSet’s Earnings Insight reports the forward 12-month P/E for the S&P 500 stands at 22.6x as of late September 2025 – above both the five-year average (19.9x) and the 10-year average (18.5x).

The trailing 12-month P/E sits at 28.3x, exceeding its 10-year average of 22.7x and five-year average of 25x.

By either standard metric, the market commands a premium over historical norms. These elevated multiples may reflect heightened earnings expectations, falling yields, or robust investor risk appetite – but they also create vulnerability to earnings disappointments or multiple compression.

The Shiller side tells a more dramatic story. As of September 1, 2025, CAPE stood at 38.34x. By mid-September, it ticked up to 40x.

The long-term historical average Shiller PE over the 20th and early 21st centuries hovers around 15x to 17x – the range many valuation analysts consider neutral to fair. The current 38x to 39x reading stands more than double that long-run average.

The last time CAPE crossed above 40x, we headed straight into the dot-com bubble.

The Verdict: Elevated Risk Across All Measures

From the Shiller lens, the market is extremely overvalued. The standard P/E – both trailing and forward – confirms a premium, though not as dramatic. The Shiller confirms structural risk.

Between the two, the Shiller P/E is more alarming because it embeds decade-long average earnings. If current earnings are cycling above trend (driven by profit margin expansion, cost structures, artificial intelligence, or capital intensity), the Shiller ratio will gradually digest those higher profits into its denominator. If future profits disappoint, the valuation will look worse.

Conversely, if these high profits persist, the Shiller may appear less extreme decades from now – but that requires a structural shift in the earnings frontier.

The combined story: Investors are paying above-average multiples on forward earnings and very elevated multiples relative to long-term smoothed earnings. That dual elevation suggests risk is not adequately discounted.

We’re due for a correction – it’s just a matter of when.

We’re in a 1996-like period, meaning valuations can get richer and the bubble can expand, perhaps for a few quarters, maybe a couple of years.

But a correction of sizable magnitude is coming.

The question isn’t whether stocks are overvalued – all measures confirm they are. The question is how long investors will pay these premiums before reality arrives.