P/E ratio is short for “Price to Earnings”
All this means, is the current price of a stock compared to it’s earnings per share.
Here’s an example:
Company XYZ currenly earns $2.00 per share a year and is trading for $40 on the New York Stock Exchange.
That would give company XYZ a P/E ratio of 20.
$40 share price / $2 EPS
Therefore, it can be assumed that if you purchased (invested) 1 share ($40) of company XYZ, you will get your original $40 back in 20 years.
Typically the S&P is considered cheap when trading under 10. Below is a graph of the S&P 500 over the last 50 years.
Below is a chart that displays how the S&P 500 has performed after trading under a PE Ratio of 10