The P/E Ratio: Financial Signal or Just Noise?

We’re diving into a topic that comes up often in the world of investing: P/E ratios. If you’ve ever read an investing article, listened to a podcast, or watched a financial news segment, you’ve likely heard this term tossed around. But what does it really mean—and more importantly, how should physicians think about it when investing? Or should we at all?

What is a P/E Ratio?

Let’s start with the basics. P/E ratio stands for price-to-earnings ratio.

It’s a simple but powerful concept: it compares a company’s stock price to its earnings. Essentially, it shows how much investors are willing to pay today for each dollar of earnings a company generates.

A high P/E ratio suggests that a stock’s price is high relative to its earnings—investors are paying more for each dollar of profit.

Conversely, a low P/E ratio indicates a stock is priced lower compared to its earnings.

On the surface, a low P/E may look like a bargain, while a high P/E may appear expensive. But like most things in finance, it’s not that simple.

Protect Your Income: Live Session

• Insurance is step one on my DIY Financial Plan Checklist. It’s the base of your financial security.

• Join me on Monday, November 3rd at 8 PM EST with Larry Keller, CFP® to learn how to protect your income the right way.

• Leave knowing exactly what coverage you need to stay protected.

Reserve Your Spot →

* Presented in partnership with Physician Financial Services

How P/E Ratios Are Used

Investors use P/E ratios for two main purposes:

Valuation: By comparing the P/E ratio of a company to other companies or to a broader market index like the S&P 500, investors try to gauge whether a stock is overvalued or undervalued
Growth Expectations: Companies that are growing faster often have higher P/E ratios because investors are willing to pay more now for anticipated future profits

For context, the S&P 500 has historically had a P/E ratio of around 13 to 15, meaning investors pay 13 to 15 times the company’s earnings per share. That gives a baseline for what “average” stock valuation looks like in the broader market.

The Speculative Nature of P/E Ratios

Here’s where it gets tricky. A P/E ratio is based on earnings, and earnings can be measured in multiple ways—past earnings (trailing P/E) or projected future earnings (forward P/E). Both approaches are inherently speculative:

Trailing P/E looks at past earnings, which doesn’t always predict the future. We all know that past performance is not indicative of future results. Just because a company made $5 per share last year doesn’t mean it will repeat—or grow—that number.
Forward P/E relies on analysts’ predictions about future earnings. Forecasting earnings is notoriously difficult, even for professional analysts. Studies show that active fund managers underperform the market about 80% of the time, highlighting how unreliable “predicting the future” really is.

You can find both the trailing and forward P/E ratios for NVIDIA here as an example.

So while P/E ratios can offer a snapshot of how the market values a stock, they are not a crystal ball. They are largely numerical speculation, a way for investors to rationalize their expectations with numbers.

Why Physicians Should Care—or Not

If you’re a busy physician, the idea of analyzing individual P/E ratios can feel overwhelming—and honestly, it probably should. Here’s my perspective:

Index Funds Simplify This: I personally invest in index funds, which track a broad market like the S&P 500. This strategy bypasses the need to evaluate individual P/E ratios. You’re essentially buying a slice of the market at its collective valuation.
Avoid the Noise: Financial articles, TV segments, and even some advisors will highlight individual P/E ratios as if they hold predictive power. They often don’t. Spending hours analyzing P/E ratios of individual stocks rarely adds meaningful value for long-term investors.
Focus on the Big Picture: Your energy as a physician is better spent on career growth, patient care, and long-term financial planning. Investing in diversified vehicles like index funds allows you to capture market growth without the guesswork of picking “the right P/E stock.”

Understanding P/E ratios is still useful

Mainly to decipher the conversation around stocks and investing. When a financial newsletter says, “Stock X has a P/E ratio of 30,” you’ll know they are signaling that investors expect higher future earnings—but also that this is speculative.

Let's examine some instances of relative utility of P/E ratios:

High P/E vs. Low P/E Stocks

Let’s break down what a high or low P/E ratio might indicate:

High P/E: The market expects the company to grow quickly. Investors are willing to pay a premium today because they believe future profits will justify the current price. Examples often include tech companies or innovative healthcare firms.
Low P/E: The market may believe the company has slower growth or higher risk. This can represent an opportunity if the market has undervalued the company, but it can also indicate fundamental problems.

The key takeaway: P/E ratios alone are insufficient to guide investment decisions. They are just one tool, among many (like a stock's beta), in evaluating the potential risks and rewards of a stock.

Comparing P/E Ratios

P/E ratios can become more meaningful when compared:

Against other companies in the same sector: Different industries have different growth expectations. A high P/E in tech might be normal, but in utilities, it could be excessive.
Against historical averages: Comparing a stock’s current P/E to its historical range can indicate whether it’s relatively cheap or expensive.
Against market indices: Benchmarking against the S&P 500’s historical P/E helps you understand whether the market, on average, is overvalued or undervalued.

Even with these comparisons, remember: context matters. A single number without broader perspective can be misleading.

Practical Advice for Physicians

Here’s how I approach this as a busy physician:

Understand the concept, but don’t obsess: Knowing what a P/E ratio represents is useful for understanding market commentary.
Focus on long-term, diversified investments: Instead of picking individual stocks, consider low-cost index funds or ETFs that track the S&P 500 or total stock market.
Avoid market timing: Trying to buy “low P/E” stocks and sell “high P/E” stocks is speculation, not investing. Over the long run, market returns are driven by broad economic growth, not individual predictions.
Use P/E ratios as a conversation starter: When reading financial articles or listening to market analysis, recognize that a P/E ratio is signaling expectations—but those expectations are far from guaranteed.

In the End

P/E ratios are a widely used metric in investing. They provide a snapshot of what investors are willing to pay for a company’s earnings, allowing for comparisons across stocks, sectors, and markets. However, they are not predictive. They are influenced by past performance, expectations of future growth, and market sentiment—all of which are inherently uncertain. P/E ratios will change as the natural market cycle changes. All we know for sure is that they will change, not how.

For physicians focused on long-term financial security, obsessing over individual P/E ratios is unnecessary. The better approach is to invest in diversified, low-cost funds, stay consistent, and ignore the noise. Think of P/E ratios as a financial language rather than a tool you need to act on every day.

At the end of the day, investing is about building wealth steadily over time—not chasing speculative numbers. Knowing P/E ratios gives you the vocabulary to understand market discussions without letting them consume your investment plan.