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Earnings, market cap and the P/E ratio
· Concept
Fact, law or dataA rule, statute, definition or measured number.
Earnings are a company's profit, market cap its total stock value; the P/E ratio, price over earnings, shows how richly it is valued.
See it on the Money & Finance map →How it works
Market cap equals share price times shares outstanding. Earnings per share is profit divided by shares. P/E is price divided by earnings per share: a $100 stock earning $5 has a P/E of 20, meaning buyers pay 20 years of current profit. 'Trailing' P/E uses the past year; 'forward' uses analysts' estimates. The inverse, the earnings yield (5% here), compares with bond yields. The S&P 500's forward P/E was roughly 22 in late 2025, versus about 16 long-run.
Why it matters
It is the quickest test of whether stocks are cheap or expensive. High P/Es mean investors expect fast growth, and leave less room for disappointment.
Think of it like
P/E is the inverse of a cap rate: a P/E of 20 is like buying a building at a 5% cap rate, paying 20 times one year's income.
Facts, rules and data
Earnings come from audited quarterly (10-Q) and annual (10-K) reports filed with the SEC. S&P publishes index P/Es; Robert Shiller's long-run CAPE data go back to 1871.
Debates and risks
High valuations, like the 1999 peak or the AI era, predict weak returns over a decade on average, but are almost useless for timing the next year.
Connections (3)
▸The 10-year Treasury yield anchors the discount rate behind Earnings, market cap and the P/E ratioMainstream view
The connection
A stock is worth its future profits discounted back to today. The discount rate starts with the risk-free 10-year yield, plus an extra 'equity risk premium'. When the 10-year rises, future profits are worth less now, so investors pay lower P/Es, especially for growth stocks whose profits lie far ahead. Mainstream view, though the link is loose.
When and why
Clear in 2022, when the 10-year rose from about 1.5% to near 4% and the S&P 500's forward P/E fell from about 21 to near 15.
How solid is the link?
Standard discounted cash flow theory, which most practitioners accept, plus episodes like 2022; over decades the correlation between yields and P/Es is weaker.
Debates and risks
The 'Fed model' comparing earnings yields directly with bond yields is disputed, and P/Es stayed high in 2024–25 despite 10-year yields above 4%.
▸Earnings, market cap and the P/E ratio is the stock-market cousin of Cap rates: how real estate is pricedMainstream view
The connection
Both measure what a buyer pays for a dollar of income. A cap rate is NOI divided by price; a stock's earnings yield is earnings divided by price, the inverse of the P/E. A 5% cap is like a P/E of 20. Both fall when interest rates drop or growth looks brighter.
When and why
The P/E has been a staple since Graham and Dodd's Security Analysis (1934); cap rates are the core of the appraiser's income approach.
How solid is the link?
An arithmetic identity taught in finance and appraisal texts; analysts routinely compare both yields with the 10-year Treasury.
Debates and risks
How to compare them is debated: NOI excludes interest, taxes and depreciation, so a cap rate is closer to a company's EBITDA yield than to its earnings yield.
▸KOSPI and KOSDAQ: Korea's stock indexes and the 'Korea discount' have long traded at a 'discount' on Earnings, market cap and the P/E ratioFact, law or data
The connection
Korean stocks have long traded at lower price-to-earnings and price-to-book ratios than US, Japanese or Taiwanese peers, often near book value. Explanations include chaebol family control, cross-shareholdings, low dividends, North Korea risk and limited currency access. Reforms since 2024 aim to raise payouts and protect minority shareholders.
When and why
Seoul; the term has been common since at least the 2000s, and the government's Value-up program began in February 2024.
How we know
Valuation comparisons from MSCI and brokers; academic studies tie part of the discount to corporate governance.
Debates and risks
How much of the discount reflects governance versus geopolitics or sector mix; experts differ, and the 2026 rally narrowed it.