Think the S&P 500 Looks Cheap? Read the Fine Print
The index’s P/E ratio depends on who is defining the ‘E’
Wall Street pros are predicting stellar S&P 500 earnings growth this year and beyond. But there’s a problem with the underlying numbers. They are often deeply distorted.
This matters to everyday investors because it directly influences how cheap or expensive the market looks. Specifically it affects the index’s price/earnings, or P/E, ratio, perhaps the most frequently cited valuation metric for stocks. If you pick an “E” that uses actual net income for the past four quarters, the index may seem pricey at about 29 times earnings.
More commonly, though, Wall Street analysts steer investors to some form of alternative earnings. Viewed this way, the index may trade for around 22 times earnings using analysts’ 2026 estimates, except the adjustments that analysts make routinely ignore regular, real-world expenses such as stock-based pay or restructuring costs.
If this seems confusing, that is the point. Investors have a veritable lunch buffet of S&P 500 earnings figures to choose from—past or forward-looking, official or nonstandard. Depending on the flavor one picks, profits may be growing rapidly or modestly. Faster growth should generally go hand-in-hand with higher P/E multiples, as investors are willing to pay more for earnings that are growing. But if there is disagreement about which starting point to use, this can lead to inflated growth perceptions, too.
While the looseness of non-GAAP metrics is a decades-old problem, the sheer size of the latest earnings-growth forecasts means it is taking on renewed importance.
Data provider FactSet in a recent newsletter showed S&P 500 earnings of almost $275 a share for calendar 2025, climbing 24% to about $341 for calendar 2026. If investors thought earnings were really growing that fast, the premium they would pay for the market today arguably ought to be higher. But they likely discount the data already, knowing there’s something off with the numbers.
Neither of those figures was calculated using generally accepted accounting principles. Both the historical results and the future projections include a mix of earnings metrics. The numbers for some companies in the index are based on GAAP, and others aren’t. If the majority of analysts covering a given company calculate its earnings using non-GAAP metrics, that is what FactSet goes with.
Other data services such as LSEG compile similar figures, and they are widely cited by strategists at top investment banks such as Goldman Sachs and Morgan Stanley.
The GAAP numbers look much different. S&P Global Market Intelligence and Bloomberg both put the index’s GAAP earnings per share for calendar 2025 at about $241, with growth from the prior year in the low teens. That is a solid increase, but nothing wild.
Ideally, the major data services would consistently collect GAAP earnings estimates for future periods and compare them with the historical numbers in companies’ official filings. But this is easier said than done.
Many Wall Street analysts don’t calculate GAAP earnings projections, even when asked explicitly for them in survey forms. So the consensus forecasts become a hodgepodge of estimates, with some tracking net income and some using earnings before bad stuff.
Even S&P’s consensus earnings forecasts have this problem. For calendar 2026, S&P data show an estimate for GAAP net income of about $337 a share. That would be a 40% increase from 2025, which looks unrealistically high. Most likely, the forward estimate and the historical baseline aren’t comparable because some analysts are using different methodologies for their forecasts.
Bloomberg publishes a variety of estimates and historical data for S&P 500 earnings, both GAAP and non-GAAP. For calendar 2026, it recently showed a GAAP estimate of about $323 a share, which would be 34% annual growth. That also looks implausibly high, indicating the figure likely includes some non-GAAP estimates, despite efforts to maintain consistency.
A core purpose for accounting standards is so investors have a common yardstick to compare companies across completely different industries. Maybe the index’s current price is a fair one. It is just hard for investors to judge if they can’t agree on what the “E” stands for.