Markets
Are we at dot-com valuations? The difference between trailing and forward P/E ratios
By Sherwin Pasha, CFA 22 July 2026 5 min read
Key takeaways
- The P/E ratio is calculated by dividing a company's current share price by its annual earnings per share, showing what investors are willing to pay for every dollar of earnings.
- The trailing P/E offers a factual baseline grounded in the past 12 months of actual performance, while the forward P/E captures future growth potential based on analyst estimates.
- Both P/E ratios work best when compared against a company’s historical averages, sector competitors, or by analyzing the gap between them.
In the late 1990s, stock market pricing of internet-based companies reached unsustainable and speculative highs because investors got caught up in the excitement of new technology and ignored traditional metrics used for valuation. So the question is, are we at dot-com level valuations once again? It is a valid question in today's elevated market, but answering it requires tuning out the noise and focusing on the fundamentals. Whether you are evaluating the broader index or a single stock, mastering the price-to-earnings (P/E) ratio is an essential first step. The P/E ratio measures how much the market is willing to pay for every dollar of a company’s earnings. Simply put, it is calculated by dividing a company's current share price by its annual earnings per share.
Source: ATB Wealth
This ratio acts as a powerful lens into investor sentiment. A high P/E ratio often means investors are anticipating robust future growth and are willing to pay more for a dollar of earnings. On the flip side, it can also signal that the market has gotten a bit ahead of itself, pushing the stock into overvalued territory.
If expectations for growth continue to rise, this leads to a phenomenon known as P/E expansion. Conversely, a low P/E might signal that the market expects little earnings growth or that a stock may be undervalued. If expectations for growth continue to fall, this then leads to P/E contraction. Investors generally look at two main types of this metric: the trailing P/E and the forward P/E. Let's take a look into both.
The foundation: Understanding trailing P/E
When we evaluate a company, we first want to know what it has actually achieved. That’s where the trailing P/E ratio comes in, as it divides the current stock price by the actual earnings per share over the past 12 months.
It gives us a factual track record because it relies on what a company has already delivered. This version of the ratio strips away speculation, making it a reliable valuation baseline. However, keep in mind a mathematical quirk of the formula. If a company's earnings drop very close to zero, the P/E ratio can become distorted. For instance, if a company recovering from losses only earns a penny per share, dividing the share price by $0.01 will artificially inflate the P/E to abnormally high levels. It makes the stock look wildly expensive, when in reality, the business is just in a transition phase.
If the company is losing money, the P/E ratio becomes negative. Since a negative valuation mathematically loses its meaning, it is typically just reported as "N/A." In these situations, the price-to-sales (P/S) ratio is a great alternative because a business could still generate revenue (sales) even while operating at a loss.
The horizon: Understanding forward P/E
While the past provides a foundation, investing is fundamentally about the future. Instead of looking backward, the forward P/E ratio divides the stock price by the estimated earnings for the next 12 months.
If expectations are for higher earnings, the forward P/E will naturally be lower than the trailing P/E, assuming the share price remains constant. Nevertheless, this metric comes with a notable drawback. It is only as good as the analyst estimates it relies on. If analysts enthusiastically overestimate or mistakenly underestimate future earnings, the forward P/E can easily miss the mark.
Context is everything
It is important to note that a P/E ratio isn’t particularly helpful when viewed in isolation. To gain actionable insight, you need to compare it against the stock’s own historical averages or against a competitor’s P/E. This metric is most effective when comparing very similar companies within the same sector.
Applying the knowledge: 30 Years of the S&P 500
Let’s put this knowledge into practice by looking at the past 30 years of the S&P 500 trailing and forward P/E ratios.
S&P 500 trailing and forward P/E ratio
The data is from January 1, 1996 to June 30, 2026.
Source: Bloomberg
Looking at the chart, you'll notice how the trailing P/E (the blue line) generally sits higher than the forward P/E (the black line). This reflects inherent market optimism. Analysts generally expect corporate earnings to grow, so these higher projected earnings increase the denominator of our formula, naturally shrinking the forward valuation when assuming a constant share price.
Looking at the right side of the chart into 2026, we see trailing P/E valuations sitting at similar elevated levels to the dot-com era around the year 2000. However, there is a difference hidden in the gap between the two lines. Back in 2000, the distance between the trailing and forward P/E was quite narrow. Today, that gap is noticeably wider. This tells a different story. A wider gap indicates that while we are paying a premium today, analysts are also expecting significantly stronger corporate earnings growth over the next 12 months. Of course, since these are just expectations, actual earnings falling short could quickly change that picture. In elevated markets, great opportunities still exist, but they require a sharper focus. It's a reminder to dig a little deeper and seek out companies with robust, justifiable earnings growth rather than simply buying the index blindly.
The bigger picture
Understanding the story behind P/E ratios gives you an advantage in making sense of market valuations. Even though these ratios are incredibly insightful, they are just one piece of the puzzle. Successful investing requires an evaluation of the full picture. By combining P/E ratios with a diverse toolkit of other financial metrics and a holistic market analysis, you can build a more resilient portfolio and navigate your financial journey with greater assurance. This is where a financial advisor’s expertise can be of great help.
-
Past performance is not indicative of future performance.
-
ATB Wealth® (a registered trade name) consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc. and ATB Securities Inc. are individually licensed users of ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness, and ATB Wealth (this includes all the above legal entities) does not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. This information is subject to change and ATB Wealth does not undertake to provide updated information should a change occur. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of the appropriate legal entity using ATB Wealth. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment. Professional legal and tax advice should always be obtained when dealing with legal and taxation issues as each individual’s situation is different.
ATB Wealth experts are ready to listen.
Whether you're a beginner or an experienced investor, we can help.