Challenging Conventional Wisdom: How a Stock with a P/E Ratio of 200 Can Outperform One with a P/E Ratio of 20 and How an Entire Stock Market Can Defy Expectations

Abstract

This article challenges the conventional wisdom that a high P/E ratio necessarily signals poor investment potential and that elevated market valuations always precede correction. By introducing the Potential Payback Period (PPP) and the Stock Internal Rate of Return (SIRR), it offers a forward-looking framework that accounts for earnings growth, interest rates and risk — elements neglected by traditional metrics like the P/E ratio, PEG ratio and Earnings Yield. Using data as of January 24, 2025, the article demonstrates how Broadcom (P/E 188) outperformed Applied Materials (P/E 22) thanks to superior fundamentals and how the S&P 500 was not overvalued, despite appearances. The retrospective value of this analysis is heightened by the political and market volatility that followed, showing how entire markets — as well as individual stocks — can defy expectations when properly understood through dynamic valuation metrics. The findings are further contextualized in a companion piece on the bear market triggered by the Trump administration’s early economic agenda.