Here is what you need to know to understand the math of the stock market now.
Price Earnings Ratio
One ratio that all Average Joe’s should be familiar with is the Price Earnings (P/E) Ratio. It is one of the more common measurements of valuation. This ratio takes the price of a stock and divides it by its’ earnings. For example, if stock were selling for $50 and the earnings were $2, the P/E Ratio would be 25.
However, it is important to understand what earnings you are using. Was it last year’s trailing earnings, or is it this year’s projected earnings? For this ratio to have any meaning, you will need to use next year’s projected earnings.
The issue, of course, is the accuracy of these earnings. These are projected earnings. Like any projection, the actual could be different than the estimate. For example, Wall Street projects a company to have $5 of earnings this quarter. Then the earnings only come in at $4. This is a “miss” on the Street. Do not expect stocks to go up when this happens.
Standard & Poor’s 500 Index
The most common proxy for the U.S. stock market is Standard & Poor’s 500 Index, also known as the “S&P 500 ” Index. This is because the other two major indexes are not as broad based.
First, the Dow Jones Industrial Average (DJIA) is the most common index used by the media. This is because it is the oldest index. When people talk about how the market did today, they are referring to the Dow as this is the accepted standard. The challenge with the Dow is that it only has 30 stocks in it. That is not broad enough to capture the whole market.
Second, the next index, the NASDAQ Composite, is dominated by technology companies. Technology companies represent 55% of the index. Like the Dow, it is not broadly based enough to represent the entire market. Think of this index as a technology sector index. 1)
To get a sense of whether you thought the market was expensive (high P/E Ratio), or inexpensive (low P/E Ratio), you could look at the S&P 500 Index P/E Ratio. According to various companies that track corporate earnings, they expect the companies in S&P 500 to earn $305 for the year 2026.
With the S&P 500 Index at about 6,700 as of this writing, which would give you a P/E Ratio of 22. At the peak of the Dot-com Bubble in March 2000, the P/E Ratio of this index was about 26. The normal range on this ratio has been from about 10 to 20.
Dividend Yield
Another measurement investors should be familiar with is the dividend yield. This is the annual dividend of a stock divided by the market price of the stock. For example, if a company were paying a dividend of $3 and the stock was selling for $100, the yield would be 3%.
Since the 1990’s, the dividend yield has been coming down. Historically, the long-term average of the S&P 500 Index dividend yield has been 2.91%. As of September 2025, this yield is down to 1.16%. 2) 3)
Why has the dividend yield declined so much?
First, stocks have been on a tear since the 2008-2009 Great Recession. The S&P 500 Index hit a low in March 2009 of 677. As of this writing, the S&P 500 Index is 6,700. This was an average annual return of 14.88%. So, the primary reason for the decline in the dividend yield has been the increase in stock prices. 4)
Second, dividends are not tax deductible by the corporation that is issuing them and are taxed as ordinary income to the individual shareholders that receive them. Therefore, dividends are taxed twice, once to the corporation due to the non-deduction, and then to the stockholders.
Third, is that management of the company began to buy back shares instead of paying out the dividends. This has the effect of reducing the number of outstanding shares, number of outstanding shares decreases, this has the effect of increasing the reported earnings per share.
Fourth, at many companies, the management’s annual bonuses are tied to the share price. Enough said.
Remember, you need to have cash to pay cash dividends. There is no subjectivity here. Corporations either have the cash to pay the dividends, or they do not.
This does not apply to stock dividends. A very modest number of publicly traded companies, under 5%, issue stock dividends. 5)
Earnings on the hand…well, let us just say there is subjectivity in this, as we have unfortunately found out.
Companies must report on their earnings using Generally Accepted Accounting Principles (GAAP). They have also learned the art of adding supplementary information to make the companies look better. The most popular form of this is their presentation of Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA). They want to present this as this report does not take into account these key expenses.
Warren Buffets late partner, Charlie Munger, summed it up best when he said, “I think that every time you see the word EBITDA, you should substitute the words ‘bullshit earnings’.” 6)
Caution light here…
All dividend-paying stocks are not the same. When reviewing the dividends of a company, you should look to the stability of these dividends. Dividend paying stocks are receiving even more press with the politicians floating various proposals to eliminate the double tax on dividends.
The Payout Ratio
Closely related to the dividend yield is the Payout Ratio. This is the dividend paid divided by the earnings per share. For example, if a company was paying a dividend of $1and the earnings were $2, then the Payout Ratio would be 50%. If a company has a low Payout Ratio, it means that they are retaining profits to reinvest in the company. An average Payout Ratio is a balanced approach. A high payout ratio means the company is committed to paying dividends. Here are the percentages for each:
A low Payout Ratio is 0% – 30%. 7)
An average Payout Ratio is 30% – 50%. 8)
A high Payout Ratio is 50%-100%. 9)
A Stock Split
No, despite what you may think:
A Stock Split is not when your ex-wife and her divorce attorney split up your stocks.
A Stock Split is when the company decides it wants to issue more shares to existing shareholders.
For example, if a company had 50 million shares outstanding at $40, they would have a market capitalization (number of shares outstanding times share price) of $200 million dollars. If they split the stock 2-for-l, there would be 100 million shares outstanding at $20. Stockholders would have twice the number of shares at half the previous price.
Please note the market capitalization is the same—$200 million dollars.
So why do companies do this? During the long bull market, this is viewed as a bullish sign from management.
Recent examples of Stock Splits are Nvidia in June 2024, split 10 for 1. Also, Coca-Cola Consolidated in May 2025 also split 10 for 1.
Additionally, a $20 stock seems “cheaper” than a $40 stock, even though they both have the same relative earnings. Keep in mind that a stock split does not change the economics of the company. Warren Buffet, a guy who knows a thing or two about investing, has never split the stock of the company he runs, Berkshire Hathaway, with the stock trading around $749,000 at the time of this writing. Hence, the high price per share.
Man Bites Dog
In a “Man Bites Dog” story, we are seeing more Reverse Stock Splits. In a reverse stock split the company will contract the number of shares outstanding.
For example, assume that a company has 100 million shares outstanding, selling at $1 a share. The company might want to do a Reverse Stock Split of 1-for-10. Under this scenario, investors would receive one share of stock for every ten they currently hold.
The market price of the share’s changes to $10 per share. Please note that just like with the “regular” Stock Split, the economics are no different for the shareholder. Before the split, a stockholder with 100 shares of a $1 stock would have $100 of value.
After the split, the stockholder would have 10 shares of stock valued at $10 per share, the same $100 of value.
OK, so why do companies implement a Reverse Stock Split?
First, they want to maintain their listing on the stock exchange they trade on. The exchanges have rules regarding stocks that trade below a certain dollar amount for a certain number of days. This is typically as low as $1.
Second, in our example, moving the share price up from $1 to $10 improves, at least on paper, the reputation and image of the company.
Break these rules, and you get de-listed. That is right—no longer listed on that exchange. Ouch!
One recent example is Lucid Group. Surprise, surprise, this is an electric vehicle (EV) manufacturer located in California. The stock had declined by 90%. Then they made a 1 for 10 Reverse Stock Split in September 2025.
The EV graveyard is getting crowded. Nikola, Fisker and Lordstown Motors have all filed for bankruptcy. Tell the cemetery caretaker to make room for one more.
The takeaway is, there is a massive difference between a Stock Split and Reverse Stock Split.
Portfolio Turnover
Portfolio turnover is the measure of how quickly a portfolio manager is turning over (buying and selling) the securities in a mutual fund. When you analyze a mutual fund, the portfolio turnover can be a significant statistic to review.
A mutual fund that has a high turnover ratio can penalize the investor in two ways. First, all this activity can generate capital gain distributions to the shareholders. Mutual funds must distribute 90% of the annual income and capital gains to shareholders.
Capital gain distributions and tax inefficiency, of course, are not relevant when investing in tax deferred accounts like 401(k) plans with IRAs. When funds are withdrawn from these accounts, they are taxed as ordinary income.
Secondarily, cost is a penalty. All the buying and selling increases transaction costs which can reduce the rate of return.
Conclusion
In financial planning, much of what we do is quantified mathematically. If you would like some help with What You Need to Know to Understand the Math of the Stock Market Now, give us a call at (860) 645-1515 or e-mail Thomas.scanlon@raymondjames.com.
This is original content written by Manchester, Connecticut Financial Advisor Thomas F. Scanlon, CPA, CFP®.
1)investopdia.com – August 31, 2025
2)investopida.com – November 29,2023
3)gurufocus.com
4)officialdata.org
5)investopia.com – August 31, 2024
6) Poor Charlie’s Almanac
7)smartasset.com – September 7, 2025
8)investopia.com – July 28, 2025
9)tokenist.com – September 12, 2025
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete, it is not a statement of all available data necessary for making an investment decision, it does not constitute a recommendation. Any opinions are those of Thomas F. Scanlon and not necessarily Raymond James.