Overview
The P/E ratio is a classic measure of a stock's value indicating how many years of profits (at the current earnings rate) it takes to recoup an investment in the stock. The current S&P500 10year P/E Ratio is 27.7. This is 37.1% above the modernera market average of 20.2, putting the current P/E 0.9 standard deviations above the modernera average. This suggests that the market is Fairly Valued. The below chart shows the historical trend of this ratio. For more information on this model's methodology and our analysis, keep reading below.
Theory
P/E ratios are a cornerstone of fundamental stock valuation analysis, and are most commonly looked at for individual firms. The P/E ratio is (as the name suggests), a ratio of a stock price divided by the firm's yearly earnings per share. The implied logic here is that a mature firm returns all profits to shareholders via dividends. The P/E then becomes a measure of how many years it will take the investor to earn back their principal from the initial investment. For example, if you buy 1 share of ACME Co for $100, and ACME consistently makes profits of $10 pershare, peryear, then it follows that it would take the investor 10 years to earn back their original $100 investment.
P/E is calculated using the last reported actual earnings of the company. Let's look at another example  one where we expect future earnings to grow. Imagine TechCo was founded 5 years ago, and their earnings per year (per share) have been $0, $1, $1.50, $2, and $5. Let's also assume that TechCo's current share price is $100, just like ACME in the prior example. Because the most recent earningspershare for TechCo is $5, that means TechCo's P/E ratio is $100/$5 = 20. The message here is that, at current earnings, investors in TechCo will theoretically get their money back after 20 years. This is twice as high as ACME  but why? If it takes twice as long for TechCo to make profits as it does for ACME, why is their stock valued at the same price? The answer is obviously the growth rate of TechCo's profits. TechCo is a new company, and has been growing profits very quickly over the last 5 years, and so investors expect that trend to continue. This is why high growth companies tend to have very high P/Es  the market has very high expectations for their future results (relative to current results).
The same analysis can be done to the entire stock market. By adding up the price of every share in the S&P500, and comparing that to the sum of all earningspershare generated by those companies, you can easily calculate the P/E ratio of the US stock market.
Below are both the total S&P500 aggregate value, and aggregate earnings.
Here is the same chart again, but with a logarithmic axis to more clearly illustrate that the data do track each other somewhat evenly.
Data
The charts above show a clear relationship between price and earnings (particularly noticeable on the log chart). Just by eyeballing that chart you can see that both series have steadily risen over time, and that S&P500 price tends to stay (very roughly) 10x20x larger than yearly earnings. By dividing price by earnings (the P/E ratio) we can see this relationship explicitly, below.
P/E10 (CAPE)
The chart above shows the standard calculation of the S&P500 PE ratio since 1950. Since this is a measurement of current price divided by most recent earnings, the calculation is subject to high volatility caused by peaks and troughs in the business cycle. For example, in mid2008 at the nadir of the financial crisis S&P500 earnings across the board fell about 90% in about one year. Despite stock prices also going down significantly, this caused the market P/E at the time to spike over 120.
For that reason, rather than use the current P/E, when doing longterm analysis it is more useful to use the Cyclically Adjusted Price Earnings (CAPE) ratio. This is very similar to the regular P/E, but rather than using the most recent earnings data, the CAPE ratio looks at current price divided by the average earnings over the prior 10 years. The CAPE ratio is shown below, and largely follows the same trend as the current PE ratio with a lot of the volatility smoothed out.
Current Values & Analysis
Creating a Model
The chart below shows the exact same CAPE ratio data series as the prior chart  only the yaxis has changed to baseline 0 at the average CAPE ratio value of 20.2, and now shows horizontal bands representing standard deviations from that average. This presentation is in line with our other valuation models.
Current Position
As of March 17, 2023, the S&P500 P/E ratio is 37.1% (or 0.9 standard deviations) above its modern era average. By this valuation, the market is Fairly Valued (see our ratings guide for more information). To fall back to the modern era average, the S&P500 would need to return to $2,856.
And finally, let's look at how this data corresponds to S&P500 performance.
This final chart shows two important ideas:

Visualizing Valuation Opportunities
First, the main line shows the S&P500 since 1950, but color coded according to the standard deviation bands from our model. I.e., when the S&P500 was more than 1 standard deviation below its P/E average (such as in 1950, and again during the mid70's to mid80's) the chart is colored green, signifying undervaluation and a buying opportunity.  To The Moon!
Take note of the dotted line in the chart above. This shows the price level of the S&P500 if it were continuously valued at the modernera P/E (CAPE) average of 19.8. That is, the dotted line is simply 20x the CAPE ratio. That dotted line is moving up faster than ever before, as corporate earnings have just exploded over the last 30 years driven by the tech boom.
Criticisms of The Model
The primary case against using historic PE as a valuation metric is the idea that PE ratios ought to be getting more expensive over time. Here is one cogent example of this argument. Changing market structures (e.g, heavier weight on growth tech stocks) can reasonably drive increased average CAPE ratios over time, as could a multitude of other exogenous factors (e.g, interest rates).
There is no arguing that the CAPE ratio has risen over time, and particularly since ~2000 when tech/growth stocks have becoming increasingly dominant in the S&P500. We agree that it doesn't make sense to compare today's market to the 1800's, and so this criticism is primarily why we do not use data prior to 1950 in this model.
Additional Resources
Below are some classics on fundamentalsbased value investing. While these aren't specifically about the P/E ratio, they espouse similar ideas, and are strongly recommended resources. The Shiller and Lynch books in particular do cover P/E.
Irrational Exuberance
byNobel Prize–winning economist Robert Shiller, who warned of both the tech and housing bubbles, cautions that signs of irrational exuberance among investors have only increased since the 2008–9 financial crisis. With high stock and bond prices and the rising cost of housing, the postsubprime boom may well turn out to be another illustration of Shiller's influential argument that psychologically driven volatility is an inherent characteristic of all asset markets.
One Up On Wall Street
byLynch offers easytofollow advice for sorting out the long shots from the noshots by reviewing a company’s financial statements and knowing which numbers really count. He offers guidelines for investing in cyclical, turnaround, and fastgrowing companies. As long as you invest for the long term, Lynch says, your portfolio can reward you. This timeless advice has made One Up on Wall Street a #1 bestseller and a classic book of investment knowhow.
Beating the Street
byAn important key to investing, Lynch says, is to remember that stocks are not lottery tickets. There’s a company behind every stock and a reason companies—and their stocks—perform the way they do. In this book, Peter Lynch shows you how you can become an expert in a company and how you can build a profitable investment portfolio, based on your own experience and insights and on straightforward doityourself research.
Applied Value Investing
byThis indepth guide shows financially sophisticated readers how to use value investing in a macroinvesting framework and how to apply it to the emerging area of super catastrophe valuation.
Data Sources
The below table cites all data and sources used in constructing the charts, or otherwise referred to, on this page.
Item  Source 

SP500 Price  Yahoo! Finance S&P500 Daily Close Values 
Historical Corporate Earnings  Publicly available S&P500 monthly data, aggregated and published by Robert Shiller at Yale; 
Current Quarter Estimated Corporate Earnings  Estimates of current quarter SP500 aggregate earnings. [Click Additional Info > Index Earnings] 