What Is a Good PE Ratio for Stocks? A Contrarian Guide

The most common mistake with the PE ratio? Memorizing a magic number. You’ve probably read that a good PE ratio for stocks is somewhere between 15 and 25. Anything lower is a bargain, anything higher is expensive. Simple.

It’s also wrong – or at least, wrong often enough to be dangerous. Let’s reverse-engineer what a useful answer actually looks like.

Why the ’15 to 25′ rule is quietly broken

The rule comes from a real number. The average S&P 500 PE ratio since 1957 is approximately 19.69, calculated from year-end readings back to when the modern S&P 500 was created. So 20-ish became the folk anchor.

Except the market you’re buying today isn’t the average market. As of late 2025, the current S&P 500 PE ratio is 29.26, and the Shiller cyclically-adjusted version is even more stretched. The historic average for the P/E10 is 17.8, but the latest ratio of 39.5 is 76% above its long-term trendline.On a percentile basis, that sits at approximately the 99th percentile of its historical range.

If you apply the textbook ’15 is cheap, 25 is expensive’ rule right now, you’ll conclude that almost every US large-cap is overpriced. Maybe. But you’ll also conclude that a stock trading at PE 22 is ‘expensive’ when it’s actually below the market’s own multiple. The benchmark is out of date the moment you learn it.

What actually determines a ‘good’ PE

Instead of one number, think in terms of four inputs. Each one adjusts what counts as good.

• Sector median – a PE of 30 is cheap for software and outrageous for utilities.
• Growth rate – a company doubling earnings can ‘grow into’ a high multiple; a stagnant one can’t.
• Earnings quality – one-time gains, aggressive accounting, or peak-cycle profits make the denominator lie.
• Interest rates – higher rates compress fair-value multiples across the board.

PE ratios vary across industries and firms because of differences in fundamentals – higher growth generally translates into higher PE ratios, and when comparing across firms you have to control for differences in risk, growth rates, and payout ratios. That’s from Aswath Damodaran’s NYU Stern notes, and it’s the honest version of the answer.

The sector table that changes everything

Look at this spread, then never take a single-number PE benchmark seriously again.

The sector-level numbers come from FactSet’s late-2025 analysis, and the industry snapshots from Fidelity’s summary of NYU Stern data. In January 2025, the average PE in the semiconductor industry was 64.15, while steel sat at 13.97 – a spread of 64x vs 14x, same stock market, entirely different valuation worlds. A steelmaker at PE 20 is expensive for its sector. A chipmaker at PE 20 might be a screaming buy.

The trap nobody warns beginners about: cyclicals

Here’s a rule that flips everything you just learned. For deeply cyclical businesses – steel, homebuilders, autos, chemicals, shipping – a LOW PE is often a warning, not a bargain. And a HIGH PE at the bottom of the cycle can be the actual buy signal.

Why? Because their earnings collapse and boom with the economy. When steel earnings are at cycle peak, the E in P/E is inflated. Divide price by that peak number and PE looks tiny – 6, 7, 8. Then earnings normalize down, and the stock craters even though the ‘PE looked cheap.’

You can see the same math at the index level. During the 2008-2009 financial crisis, the PE ratio surged into the triple digits because earnings plummeted faster than prices; during the tech bubble and 2020 pandemic the TTM PE reached 46.7 and 39.3 respectively – showing why TTM PE can be unreliable at critical moments. A PE of 100 in a recession isn’t ‘the market is insanely expensive.’ It’s the denominator temporarily dying.

Pro tip: For cyclicals, replace PE with a 10-year normalized earnings figure – the same logic behind the Shiller PE10. It smooths peaks and troughs so you’re not fooled by whichever quarter you happen to be looking at.

A real-world example: reading today’s market

Here’s how I’d walk through the market’s PE right now, using only facts on the table.

The trailing S&P 500 PE is roughly 29 – well above the ~20 historical average. That’s alarming on its face. But the forward PE sits closer to 21.4, and the historical average TTM PE going back decades is around 16.2 per Advisor Perspectives. The gap between trailing (26.8) and forward (21.4) tells you analysts expect a big earnings jump.

Are they right? Maybe. Analysts were projecting record-high EPS for the S&P 500 of $268.30 in 2025 and $304.88 in 2026 as of October 29, 2025. But note what actually moved the multiple higher this year: from April 8 to October 29, the S&P 500 price rose 38.3% while the forward 12-month EPS estimate rose only 7.1% – the increase in the ‘P’ was the main driver of the increase in the P/E ratio.

Translation: the market got more expensive not because earnings surprised to the upside, but because investors were willing to pay more per dollar of the same earnings. If those forward estimates miss, today’s ‘reasonable’ forward PE quietly becomes tomorrow’s ugly trailing PE.

Pro tips for actually using the ratio

1. Compare to the stock’s own history, not the market. If a company usually trades at 18x and now trades at 12x, that’s more interesting than the absolute number.
2. Cross-check with PEG. A PE of 40 with 40% earnings growth (PEG = 1) is different from a PE of 20 with 5% growth (PEG = 4).
3. Beware negative signals hiding in low PEs.Damodaran’s research shows low PE stocks outperform high PE stocks by 9 to 12% per year on average – but many low PE stocks carry the risk of low growth prospects, deteriorating balance sheets, skepticism about earnings, or a high risk of bankruptcy; a truly undervalued stock requires a low PE without the stigma of high risk or poor growth.
4. Never buy on PE alone. Cross-reference debt levels, free cash flow, and return on invested capital. PE is a starting question, not an answer.

One thing I keep coming back to: the PE ratio is a compression of a full valuation model into a single number. Every simplification hides something. The question isn’t ‘what’s a good PE’ – it’s ‘what is this specific ratio hiding right now?’

FAQ

Is a PE ratio under 15 always a bargain?

No. It often means the market has priced in trouble the trailing earnings don’t yet reflect – declining margins, a bad quarter about to hit, or a cyclical peak that’s ending.

What PE ratio should I look for as a beginner in 2025?

Skip the absolute number. Pick a stock, find its sector’s forward PE (Info Tech ~32, Industrials ~24.5, Communication Services ~22 as of late 2025 per FactSet), then compare. If the stock trades notably below its sector peers AND has similar or better growth, it’s worth a deeper look. If it trades above, ask what justifies the premium – real earnings acceleration, or just hype.

Trailing PE vs forward PE – which one matters more?

They answer different questions. Trailing PE tells you what you’re paying for earnings the company actually produced. Forward PE tells you what you’re paying if analysts turn out to be right, which is a bigger ‘if’ than most people admit. Look at both, and when they diverge sharply (as they do today), treat it as a signal that expectations are doing heavy lifting.

Your next step: pick one stock you already own or are watching. Look up its trailing PE, its forward PE, and its sector’s average forward PE. Write down the three numbers. If you can’t explain the gaps between them in one sentence each, you don’t yet know whether you’re overpaying.