24 Sep 2026 Stocks Are Getting Cheaper?

The stock market is having another banner year. Through September 23rd, the S&P 500 is up 12.5%, and has more than doubled since the start of 2023. What’s driven the run-up? Earnings! Earnings, earnings, earnings. As an investor in the stock market, that’s what you are buying: the future earnings of a company, sector, or, in the case of how we invest our clients’ money (and our own), the global economy. Corporate earnings per share grew by double-digits in 2023, 2024 and 2025, and in 2026 are projected to grow in excess of 30%. This has led to a rapid increase in the P/E Ratio, the primary method of valuing stocks, as you can see in the chart below. The highlighted section, which I added, shows 2023 through 2025:

As the stock market continues rising, a curious thing is taking place: the P/E Ratio is falling, as you can see to the right of the highlighted section. Since the beginning of the year, it’s down from around 23 to 19.4, as of August 31st. That’s right: stock prices are up, but valuations are down.

What is taking place is pretty simple: earnings, the denominator in the P/E Ratio, are growing faster than prices, the numerator. But why are stocks suddenly getting cheaper? There are a few possible explanations:

The hoped for earnings have been realized

As I mentioned earlier, investors are essentially buying a share of future earnings. If earnings grow, prices tend to rise, and investors make money. An argument could be made that the earnings growth of the last few years didn’t merit the degree to which prices were rising. Hoped-for earnings are finally being realized, but there’s also a chance that…

Investors are getting nervous

Another explanation is that investors are getting nervous. Sure, demand for stocks is still pushing prices up, but not with the same fervor. No bull market runs forever, and there’s a legitimate debate about whether or not the ludicrous amounts of AI investment (Goldman Sachs estimates $1T in 2026 alone) will generate an ROI. That, combined with persistent inflation, rising interest rates, the national debt, and the conflict with Iran, may be making investors nervous. It could also be that…

Bonds are more attractive

Bonds! Ever the punching bag, 10-year U.S. Treasury bonds are now paying nearly 5%. Fatigued equity investors, nervous about stocks in the short-to-intermediate term, may be more than happy to lock in the 5% yield that government bonds are currently offering. The most recent 5-year Treasury offering and overall surge in rates are arguments against this, but at some point rates will be too good to ignore. Or maybe it’s that…

We’re near the end of a cycle

Going back to 1871, there’s only been nine instances of earnings growth lasting four-or-more years. If 2026 ends in the black, which it projects to, it would be the tenth. This stuff tends to be cyclical, and there’s a chance we’re coming up on the end of a cycle.

The P/E Ratio is notoriously unreliable in the short-term, so making investment decisions based off this recent trend would be foolish. That being said, valuations have long been elevated: For the better part of six years, investors have been willing to pay greater multiples of earnings than they have historically, so a drop in the P/E Ratio during a rising market is a positive. A perfect scenario would be corporate earnings and stock prices continue to rise, with the former outpacing the latter, which would continue to push the P/E Ratio down, though that’s probably too much to ask for.

At the end of the day, the P/E Ratio isn’t a market-timing tool—it’s a expectations-setting tool. A falling ratio during a rising market doesn’t tell you to buy or sell tomorrow, but it does tell you something useful: the market is, for now, being more disciplined about what it’s willing to pay for a dollar of earnings than it has been in years. That’s worth paying attention to, not because it predicts the next move, but because it’s a reminder that valuation and price are two different things—and long-term returns are shaped far more by the former than the latter.

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