The forward price-to-earnings ratio is the most popular way to figure out how much a stock is worth. This is the current price of a stock divided by what analysts at brokerage firms or research firms that give information to brokers think the business will earn per share over the next 12 months. People often say that the growing forward P/E ratio for the S&P 500 is proof that stocks will go down in general.
But some S&P 500 SPX +0.80% stocks did better than the index as a whole last year, even though their forward P/E rates went down. This means that expectations of rolling earnings were going up faster than the prices of shares. Larry Fink, CEO of BlackRock, said this would happen to some stocks in October when he was asked about the market’s high value.
If prices keep going up and the forward P/E ratio goes down, it could mean that more gains are possible in 2025.
To go back to the main worry about high valuations, investors who want the stock market to grow in the long term should always be ready for broad declines. Think about the fact that the S&P 500 has returned 97% over the last five years when profits are reinvested, even though it dropped 18.1% in 2022. FactSet says that the index has had an average annual return of 14.5% over the last five years. This is higher than its average annual return of 10.9% over the last 30 years. Overall, the last five years have been great for people who have invested in index funds like the SPDR S&P 500 ETF Trust SPY +0.74%, as long as they haven’t sold when prices went down.
Before we list the stocks that did better than the S&P 500 even though their forward P/E ratios went down, let’s take a quick look at how the weighted values for the index and its 11 sectors changed in 2024. Every time prices change after this point, dividends are not included.
These are the 11 S&P 500 sectors, with the full index at the bottom. They are shown by their forward P/E rates for the end of the year.
| Sector | Forward P/E | Forward P/E a year ago | Forward P/E to 5-year average | Forward P/E to 10-year average | 2024 price change |
| Consumer Discretionary | 29.3 | 26.3 | 93% | 109% | 29.1% |
| Information Technology | 28.8 | 26.6 | 116% | 141% | 35.7% |
| Industrials | 21.7 | 20.1 | 102% | 113% | 15.6% |
| Consumer Staples | 21.5 | 19.3 | 106% | 109% | 12.0% |
| Communication Services | 19.5 | 17.3 | 101% | 103% | 38.9% |
| Materials | 18.3 | 19.3 | 102% | 108% | -1.8% |
| Real Estate | 17.6 | 18.1 | 91% | 93% | 1.7% |
| Utilities | 17.3 | 15.7 | 97% | 99% | 19.6% |
| Health Care | 16.8 | 18.1 | 99% | 102% | 0.9% |
| Financials | 16.5 | 14.6 | 109% | 115% | 28.4% |
| Energy | 13.6 | 11.1 | 615% | 97% | 2.3% |
| S&P 500 | 21.6 | 19.7 | 108% | 117% | 23.3% |
| Source: FactSet | |||||
You might have to scroll down the table to see the price changes in 2024 in the right column.
Forward P/E for the whole S&P 500 has gone up from 19.7 to 21.6 in the past year, and it now trades well above its usual value over the last 10 years. The biggest difference between the present value and the average over the last 10 years is in the IT sector, even though the consumer discretionary sector has the highest forward P/E right now.
It’s important to remember that not all Big Tech stocks are in the IT business. Alphabet Inc. (GOOGL +1.11%) and Meta Platforms Inc. (META +3.06% ) are in the communications services sector, while Amazon.com Inc. (AMZN +2.31%) and Tesla Inc. (TSLA -4.57%) are in the consumer discretionary sector.
