Key Takeaways
- Citigroup's profit jumped 40% and beat estimates, while JPMorgan missed expectations despite $15.3 billion in profit. Markets price results against expectations, not against the absolute size of earnings.
- The P/E ratio is the most common of the earnings valuation multiples, but every new earnings report changes its denominator, so a multiple can shift even when the share price does not.
- A headline profit figure is only a starting point. Analysts ask whether earnings are repeatable, which multiple suits the industry (banks often lean on price to book as well as P/E), and what peers trade at.
Two banks, two opposite surprises
This week, two of the biggest US banks reported quarterly results that pointed in different directions. Citigroup's profit jumped 40% and came in ahead of analyst estimates. JPMorgan, by contrast, missed earnings expectations even though it reported $15.3 billion in profit.
That contrast is the best reminder of what earnings season is really about. Investors do not ask whether a company made money. They ask whether it made more or less than the consensus forecast already built into the share price.
What the P/E ratio is really saying
The price to earnings ratio, or P/E, is the multiple most people reach for first. In plain terms, it tells you how much investors are paying today for each unit of a company's earnings. A higher P/E suggests investors expect stronger growth, lower risk, or both. A lower one suggests the opposite, or a market that has overlooked something.
Earnings season matters because it refreshes the earnings side of that ratio. When a company reports, analysts update their numbers, and the multiple moves even if the share price has not. Candidates should also separate two versions. A trailing P/E uses earnings already reported. A forward P/E uses expected future earnings. After a result like Citigroup's, the trailing figure changes immediately, while the forward figure depends on whether analysts raise their outlook. The news summary does not say how analysts responded to either bank, so that is something to watch rather than assume.
Why a 40% jump needs a second look
A 40% rise in profit sounds decisive, but a good analyst does not stop at the percentage. Growth is always measured from a starting point. If the comparison period was weak, or if the latest figure includes one-off items, the headline can flatter the underlying business. The news summary does not tell us which factors drove Citigroup's result, so the right move is to treat that as a question rather than assume an answer.
This is the idea of earnings quality. Are profits repeatable, or did they come from reserve releases, asset sales, or other items that will not recur? A P/E built on unusual earnings can look cheap or expensive for the wrong reasons. The same logic applies in reverse to JPMorgan. A miss against estimates is not the same as weak earnings power, and an analyst would want to know whether the shortfall is timing, a temporary cost, or something more lasting before deciding the shares deserve a lower multiple.
Beyond P/E: the multiples analysts actually watch
No single multiple works for every company. For banks, analysts often look at P/E alongside price to book value, because a bank's balance sheet is central to its business and its capital is what generates earnings. Enterprise value multiples, which are popular for industrial or technology firms, sit awkwardly with banks because debt and deposits are part of their raw material rather than simply a financing choice. Growth-adjusted measures, such as comparing the P/E with expected earnings growth, can help when two companies expand at different speeds.
Peer comparison adds another layer. Placing Citigroup and JPMorgan side by side is tempting, but a lower multiple does not automatically mean a bargain. It may reflect lower profitability, a different business mix, or higher perceived risk. A multiple is a shorthand for what the market believes, and your job is to decide whether that belief is justified. The CFA curriculum rewards exactly this habit: choosing the right multiple, understanding what drives it, and noticing when it is misleading.
What to watch next, and how to test yourself
As more companies report, watch two things. First, whether analysts revise their forward estimates after each result, since that moves forward P/E ratios more than the headline number does. Second, how the market treats beats and misses relative to size, as the Citigroup and JPMorgan contrast shows. Those habits turn a noisy week of headlines into a disciplined valuation process.
If you are preparing for CFA Level 1, a good test is whether you can explain, without notes, why a trailing and a forward P/E can tell different stories after the same earnings release, and why a bank might be judged on a different multiple than a manufacturer. You can check where you stand with a free 30 question mini mock. The full EduFite course then builds the complete toolkit for equity valuation, with structured practice so you can apply these ideas under exam pressure.
FAQ
What is the P/E ratio in simple terms?
The P/E ratio shows how much investors are paying for each unit of a company's earnings. A higher figure usually signals higher growth expectations, lower perceived risk, or both.
Why can a company's P/E change during earnings season even if its share price stays the same?
Because earnings are the denominator. When a company reports new results and analysts update their estimates, the earnings figure changes, so the multiple changes too.
Why do analysts use price to book for banks?
A bank's balance sheet and capital are central to how it earns money, so price to book is a natural complement to P/E. Enterprise value multiples fit banks poorly because debt and deposits are part of their operations.
Does beating earnings estimates always mean a stock is a good buy?
No. A beat only shows results exceeded expectations. Analysts still need to judge earnings quality, whether profits are repeatable, and whether the valuation multiple already reflects the good news.