Stock prices continued to climb in the third quarter (Q3) of 2025 — after dropping from a record peak at the end of 2024. The price-to-earnings (P/E) ratio also increased slightly to 27.88 in Q3 2025, well above the historically applicable benchmark of 15.5 – representing an annual corporate earnings rate of 6.5%.
The stock market’s P/E ratio for the price of stock is the reciprocal of the capitalization (cap) rate – how buyers of real estate price their investment. The peak 2025 P/E ratio of 27.88 is equivalent to a cap rate of 3.59% – far from great, but an improvement over 2020 when the P/E equivalent was a cap rate of just 2.5%. Savvy real estate investors today tend to demand far higher cap rates to stay ahead of the inverse effect of rising long-term interest rates on pricing.
Following the 2022 plunge in stock prices, the stock market officially gained bull market status in Q2 2023, having climbed over 20% from the Q3 2022 bottom. However, stock market pricing has long been detached from reality, continuously spiking to new heights in the past decade. Watch for more volatility as stock market investors continue to react to Federal Reserve actions on interest rates and the current undeclared economic recession.
For real estate, this means we are in a hold phase as savvy investors look ahead to the next buyer’s market, evolving when property prices hit a bottom. Expect property prices to decline in 2026, hitting bottom around 2028 when the next buy phase begins.
Updated October 13, 2025.
Chart update 10/13/25
Chart update 10/13/25
| Q3 2025 | Q2 2025 | Q3 2024 | |
| Price Index | 6,205 | 5,612 | 5,461 |
| P/E Ratio | 27.9 | 25.9 | 27.9 |
Track the current stock pricing and earnings on the S&P 500 stock pricing index and compare the world of the stock market with the world of real estate.
firsttuesday analysis
The red line of the first chart above tracks pricing of the 500 stocks listed in the Standard and Poor’s (S&P) 500 index. The light blue shading in the top chart tracks earnings as a percentage of total price, a figure analogous to the rate of capitalization, or cap rate, used by real estate investors. The dark blue line in the second chart above tracks the price-to-earnings ratio for those S&P 500 companies, called the net income multiplier (NIM) used for a rule-of-thumb evaluation of a parcel of real estate.
In the stock market, the price paid by buyers is expressed in terms of a multiple of the company’s annual earnings, called a P/E ratio. Conversely, the price a buyer pays for income producing real estate is set by dividing the property’s net operating income (NOI) by the rate of return sought by the buyer, called a cap rate.
A seller agent marketing an income property expresses the seller’s asking price as a multiple of the property’s net income (earnings), or net income multiplier (NIM). The NIM figure is simply the reciprocal of the cap rate a buyer uses for their evaluation of the price they will pay for a property.
For example, net earnings from a property equaling a 5% cap rate on the seller’s asking price is equivalent to a NIM (or P/E) ratio of 20. Seller agents use the NIM figure, say, 20 (the P/E ratio), while buyer agents use the cap rate figure, say, 5% (the rate of return). Appraisers and BPO evaluating income property use a cap rate to express and set a property’s price.
Remember:
- real estate buyers seek monthly income for years to come based on the property’s fair market value (FMV) when purchased, which is set by use of a cap rate; while
- stock market investors primarily seek resale profits, not income, based on an increase in the price when the stock is sold (while watching any dividend payments).
The difference is in the approach to investing: stocks are primarily about capital gains on a sale versus ownership of income producing real estate is focused on annual income, not a resale.
The dramatic rise in stock pricing in the mid-1990s was accompanied by a huge increase in the amount of funds entering the stock market. The aging Baby Boomer generation was earning more and investing more heavily in stocks which produced an hydraulic lift effect on pricing.
To maintain the lifestyle they are accustomed to, the Boomers in retirement will draw down their savings and use their accumulated wealth to consume goods and services, which works to keep the price of stocks from rising.
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Real estate applications
The real estate and stock markets are not the same, of course, but thoughtful investors pay attention to their relationship. There are some notable distinctions to be made between the two.
Real estate investors will never be satisfied with the 4% returns offered by stocks when the P/E multiplier is closer to 25. Property owners certainly do not buy real estate based on a 4% cap rate – a net income multiplier (NIM) of 25 – the current P/E ratio buyers of stocks are settling for. Further, problems that plague stocks, like spurts of inflation and short-term interest rates, take years to work their way into the income of residential or commercial occupants whose income controls real estate values, but not stocks.
Real estate investment pricing is driven by the cap rate an investor uses to set real estate prices. A cap rate for an income property is established as the aggregate sum of the annual percentages an investor expects for a return on and recovery of their invested capital, such as:
- an annual real return;
- an annual return for consumer inflation;
- a percentage for demographic risks; and
- an annual percentage for recovery of capital.
Initially, an annual 2.5% to 3.2% of invested capital allocated to property improvements is by necessity recovered annually. It’s a return of capital, not earned income, and as capital is not taxed when recovered annually or on a sale.
And this 2.5% to 3.2% is just for covering the unavoidable deterioration of the asset due to obsolescence and aging cured only by renovation or replacement, commonly called depreciation.
Capital recovery problems are inapplicable to investments in companies listed on the stock market. They sell products which can be changed to suit the current needs and location of the population – unless, of course, it is stock in a real estate investment trust (REIT). Real estate has no such flexibility as it is, well, immobile.
The P/E ratio
The price-to-earnings (P/E) ratio is a simple abstraction, a multiplier used to compare the market price of a stock with the earnings of the company.
From the end of World War II to the late 1990s, the P/E ratio of the S&P 500 hovered between 10 and 20. This range represents, respectively, from 10% to 5% corporate earnings on the price paid for the stock.
Around 1997, however, the P/E ratio reached unusually elevated numbers, which remained elevated until 2002. Part of the accelerated rate was due to a surge of Boomer earnings and investments driving up the overall price of stocks (just as home prices were boosted by the surge in Boomer demand in the mid-1980s and the predatory mortgage lending that fed the 2005 peak in housing construction).
Nonetheless, after the 2002 stock market crash ended, the P/E ratio remained near 20 (see darkened bar on chart). Soon, the financial crisis of 2007 reached its apex in the last quarter of 2008, when the P/E ratio abruptly jumped from 25 to 60 as stock prices failed to adjust to the drop in earnings. The P/E ratio peaked at a multiplier of 122 in the second quarter of 2009, with annual earnings based on pricing of only 0.82%.
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These numbers were fueled by irrational optimism among investors, not by legitimate pricing expectations about the future income of these companies. After dramatic stock price drops by mid-2010, the ratio had fallen to 16, right in line with its historic link to earnings, thanks to tepid earnings and a continuing lack of confidence about growth in the economy.
Now, the AI bubble has money funneling into the stock market, raising prices and buoying confidence at a time of economic downturn elsewhere. Due in part to the sudden shock of trade taxes raising the cost of domestic and imported materials, this accelerated growth in stock pricing is not matched by a lift in jobs, which are deteriorating, or consumer spending, which is declining.
Instead, the present ongoing real estate recession continues to make buyers of real estate hesitate to act, other than to wait for pricing to bottom and improve.
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I have been using the chart that compares the S&P index to the earnings. I cannot understand it since the P?E has been reasonably stable. One part is an absolute number, the other a percentage. Is it compatible?
This is a great article. Very well thought out. I was doing the same calculation just today and ran across this piece. The message I struggle with are the replacement costs and the leading indicators.
The real estate market and the stock market are distant in-law cousins. Real estate markets generally speaking are divided in Housing and Investment.
-Housing market values are driven by personal values (likes, dislikes, color, neighborhood, etc, etc) and values have very little to do with return. Simply, housing is shelter and should never be viewed as an investment. In fact, on many occasions buyers are willing to pay more to satisfy their personal desires.
-Investment – Real estate has become an Asset Class that investors compare to Bonds because they have similar elements when evaluating and choosing it as an investment, in addition, it offers the investor a hedge against inflation. Capitalization rates are directly derived from Bond market rates. Incidentally, as rates go up Capitalization rates will go up and consequently values of properties will go down.
Very informative Didn’t understand anything
There might be a correlation between P/E and the CAP rate.
Very Infomative. I would like more information on this topic. I am not interested in an ongoing financial obligation.