S&P500 Price to Sales Ratio

Price to sales is a very generalized measure of overall value of the stock market compared to the underlying sales generated by the companies in the market. Since 2000 it has averaged around 1.8. As of December 31, 2024 the S&P500 Price-to-Sales ratio is 3.0. That value is 2.3 standard deviations above normal, indicating that the market is currently Strongly Overvalued.

The theory behind the usefulness of this model is fairly straightforward: all else equal as companies generate more sales, they should be able to turn that into larger profits, which should cause their stock prices to go up. Therefore, if the price to sales ratio is very far from its average value, it may indicate that the price of stocks is relatively over/under valued.

As a concrete example, if a company's stock price is $75, they have one million shares of stock outstanding, and they generate total annual sales of $50M, then their price to sales ratio would be 1.5. The below table shows how this changes as the inputs change.

Stock Price	Total Shares	Market Cap	Annual Sales	Sales per Share	Price to Sales Ratio
$75	1M	$75M	$50M	$50	1.5
$85	1M	$85M	$50M	$50	1.7
$90	1M	$90M	$60M	$60	1.5
$140	1M	$140M	$70M	$70	2.0

This works exactly the same in aggregate for the S&P500.

The below chart shows both the S&P500 price, and the trailing 12-mo annual sales (per share) of the S&P500 constituent companies since 2000. You can easily see that in the last 15 years the stock price has risen substantially faster than underlying annual sales.

... so it follows that we would expect to see that the price to sales ratio has risen considerably, which is shown in the chart below.

Why not look at earnings?

Why should we care about sales at all? We've already established that looking at the price to sales ratio is useful because trends in sales data should be indicative of trends in earnings. So why not just look at earnings directly?

First of all, we already do. Price to earnings (PE) ratios are commonly used to understand valuation levels of both individual stocks and the aggregate stock market. But there are several reasons to consider sales data when trying to understand firm and market valuation.

• Sales is less volatile than earnings: Sales are generally more stable and less subject to accounting manipulation, making P/S a smoother, more reliable measure over time, especially in turbulent periods (e.g., during a recession or pandemic).
• Distorted Earnings in Low-Interest or High-Leverage Environments: When interest rates are low or companies are highly leveraged, earnings can be artificially boosted due to lower interest expenses. Sales aren’t affected by financing strategies, so price to sales ratios avoid distortions tied to capital structure.
• Sector Shifts: High-Growth/Low-Earnings Firms: In markets with a heavy weight of tech and growth stocks, earnings may be low due to reinvestment or stock-based compensation, but sales should remain strong.

Limitations of the Indicator

No single model should be used in isolation. These are the key drawbacks of looking at aggregated price to sales data:

• P/S Ignores Profitability: P/S tells you how much investors are paying for each dollar of revenue, but it says nothing about whether companies are actually earning profits, which is the key driver of any stock's value.
• P/S Doesn’t Reflect Sector Composition Changes: The US economy is shifting more and more towards high-margin software and technology firms. It should be no surprise that P/S ratios are rising over time, as our economy becomes more focused on technology, firms are able to squeeze more profit from each dollar of sales. As this trend continues, it would be misleading to think that the higher P/S ratio necessarily means the market is overvalued. Note: We specifically exclude pre-2000 data from our model for this reason, but it is still important to understand this trend.

To finish up our model and get a better idea of the current price to sales ratio compared to historical norms, we show the the price to sales ratio since 2000 with its average and standard deviation bands.

As shown, the price to sales ratio of the S&P500 as of December 31, 2024 is 3.0. That value is 2.3 standard deviations above normal, indicating that the market is currently Strongly Overvalued.

The below table cites all data and sources used in constructing the charts, or otherwise referred to, on this page.

Item	Source
S&P500 Price and Sales	SPGlobal Current quarter and future period sales estimates derived from SPGlobal operating margin and earnings estimated data.