Stock markets posted mixed results in February. International stocks and US small-caps increased, along with bonds. US large-caps declined. So far in 2026, all four asset classes have gone up, with international stocks doing best.
Know The Value Of What You Own
What factors cause stocks to fluctuate up and down?
Since stocks are legal ownership of companies, over the long-run (years or decades), their value is related to the profits companies earn. As they improve their products and increase their profits over time, their stocks increase. Historically, stocks have always gone up over time because people have always innovated new products and services, provided customers with more value, and made more money.
So in theory, stocks should perfectly track company earnings. But as you probably know, the stock market doesn’t actually work this way. Why is that? This long-term view assumes that investors are always rational decision makers, but in reality, investors are people.
In the short-term, people tend to be emotional decision makers. Sometimes we feel confident and willing to take risks, while at other times we feel doubtful and scared. The political environment, our career trajectory, the level of interest rates, or the economic situation can all impact on our willingness to buy or sell investments. As advisors, one of the ways we can quantify current investors sentiments about the market is through a valuation ratio.
A common valuation is the P/E Ratio, which is calculated by dividing the current Price of a stock by its Earnings per share. For example, if the price is $20, and the earnings per share are $2, its P/E Ratio is 10 (20 / 2 = 10). Using this ratio, and the fact that we have both of these pieces of information for thousands of companies over decades of time, we know that valuation ratios can and do change, sometimes significantly and quickly.
While most stocks are off to a good start in 2026, the most newsworthy story so far has been the rapid decline in software stocks. iShares Expanded Tech-Software Sector ETF (Ticker Symbol: IGV) is an exchange-traded fund that consists of stocks such as Microsoft, Palantir, Oracle, and Salesforce. So far this year, IGV is down almost 23%.
What caused these stocks to go down so much? Based on the long-term view we talked about, you might think that their earnings have declined. But this isn’t the case for IGV. Instead, these stock valuations have contracted. This means that investors are just not willing to pay as high of a price as they were a few months ago. To illustrate this, here is a chart for another holding in IGV: Intuit (INTU), maker of QuickBooks – an accounting software for small businesses. INTU stock is down over 38% YTD.
The purple line shows the price of INTU – currently at $409, after peaking around $800 last summer. The orange line shows the current P/E ratio. As you can see, the lines are related to each other. From 2023 through 2024, the price was moving higher while the P/E ratio stayed in a range, indicating that INTU earnings were increasing. Since the summer of 2025, both lines have been falling in tandem. This implies that the price movements in the stock are mostly explained by the changes in valuation rather than actual changes in earnings. In other words, so far, even though INTU’s business performance has been fine, the stock is down around 50% from its high point. Changes with investor emotions can lead to big changes in valuation, which in turn affect returns and performance.
Even though you don’t hold INTU in your account, we do monitor valuations in general for the following reasons:
- Awareness and Information – The markets value stocks differently. Some stocks have high P/E ratios (25 or higher), some have low (15 or less), and some are in the middle (15 – 25). If a company has high expected earnings growth, stable or predictable earnings, high profit margins, a very strong balance sheet, and excellent executives who manage company money well, investors are usually willing to pay a higher P/E to invest. The opposite is also true.
- Risk Management – High P/E ratios mean that everything is great – right now. But over the long run, valuations tend to fluctuate up and down. Business dynamics constantly change, and companies often encounter competition, changes to suppliers or input costs, or economic downturns which affect their profits. High P/E stocks are vulnerable to valuation compression if any negative news surfaces. In the case of INTU and IGV, speculation that artificial intelligence will replace, compete, or commoditize software has been enough to drive these stocks down significantly. It’s important to note that all this is based on future speculation, and time will tell exactly how that plays out.
- Probability of Success – The future is always uncertain, but for long-term investors, knowledge of valuations can help inform their investment decisions and give them the best chance for future success. If you are buying an investment, the price you pay can have a big impact on your future rate of return. While there is no magic formula with regard to valuation levels, when we recommend investments to you, we want to make sure we are paying low or reasonable valuations because we plan on holding for years. While some companies have been able to command premium valuations for the long-run, there are many examples of stocks that at one time had high valuations, and when some unexpected bad news surfaced, the stocks suffered in a big way. The opposite is also true. Sometimes, a low valuation stays low for a while, or permanently. But if conditions improve, and the valuation expands, investors can make very attractive returns.
The biggest driver of long-term success is sticking with a thoughtful plan through the good times and bad. If you’d like to talk through your current circumstances or your portfolio, please reach out anytime.
