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And my goodness, it was a big week for tech stocks with four of the Mag seven members reporting quarterly results. These are some of the most powerful and expensive companies in the world. As part of our tech investing playbook, we want to talk about how investors can understand whether a tech stock is worth the price. One of the most commonly used metrics to measure value is something called the PE ratio, which measures a company's share price relative to its earnings per share. So here with more, we've got Jessica Incipe, who is the director of Investor Research at Stockbrokers.com. Jessica, good to see you, good to have you back here with us. So, help us dig into this definition starting with what a PE ratio tells us about a stock versus what it doesn't tell us.

Yeah, absolutely. So, it, like you said, we're looking at the price relative to its earnings. You may look at Berkshire Hathaway, class A, and say that's a very expensive stock, and then compare it to Apple and think that that is less expensive, but that's really not normalizing it. So, a PE ratio gives us an equal playing field so we can normalize it and understand if it's expensive relative to its earnings in comparison to something else that could be a sector, another security, the overall broader market. And it essentially tells us, the definition anyways, what investors are willing to pay for one dollar worth of earnings. But it's important to take that such a step further when interpreting it. So, for example, if something has a very high PE, it always tends to be tech stocks because it's the price divided by earnings. If there is higher earnings potential, that means there's going to be a higher PE ratio. But we expect that from tech because it's growth where you might have something that's more low beta, like a consumer staples, that's going to historically and currently have a lower PE ratio. So, we have to think about the numbers and the math equation to really utilize it.

Okay, so let's take this one step further and expand it a little bit. What about trailing PE price to earnings versus forward price to earnings? And how are those different? And when should you be kind of applying your knowledge around each of those?

That's such a great question and a very common misconception, especially in the self-directed investing world. I see lots of investors look at the trailing 12 months to understand if something is expensive or cheap in terms of valuation now. That's not necessarily true. Are we want to look at a forward PE ratio. Right now, the S&P 500's current forward PE ratio is 20.3. Historically, their 10-year average is 18.3, and the five-year is about 19.9. It's more technology-driven because of this AI. So, I expect, we're seeing those averages increase higher as well. But that is telling us forward expectations. We want to know what is the earnings potential of this security that we're looking at. Tech specifically, how is AI going to translate into earnings? That's constantly what we're saying on finance media. I expect this AI, AI agent to translate positively into earnings. If that translates positively into earnings and we have higher growth expectations, well then that's going to transfer into the way that we look at PE ratio. So, meaning, even if you see something that has a high PE ratio because the price is inflated and you may think that the divisor isn't necessarily true. So, when we're looking at this, we want to decide, is the price where I think it's going to be? That's the top way, or the very common way that PE ratio is utilized with that trailing 12 months, which is the past, whereas the way to look at it for a future investment is looking at forward earnings potential, and you're going to decide, is the price too high or is the earnings potential not high enough or low enough? And there are lots of other factors we can look at to make those decisions.