Stocks can become cheaper without a major price decline when earnings grow faster than their market value. Investors can identify these situations by comparing earnings growth, valuation multiples, estimate revisions and financial quality.
Finding stocks with growing earnings and falling valuations requires looking at two sides of the same equation: how quickly a company's profits are increasing and how much investors are paying for those profits.
That distinction matters because a stock does not necessarily become cheaper only when its share price falls. A company trading at 25 times earnings can move to 20 times earnings if its earnings rise substantially while the share price remains relatively stable.
The current market provides a useful example of why this approach matters. FactSet reported Oct. 2 that analysts expected S&P 500 companies to deliver more than 25% year-over-year earnings growth for the third consecutive quarter. At the same time, the index's forward 12-month P/E ratio was 19.0, below its five-year average of 19.8 and slightly below its 10-year average of 19.1.
That combination—strong earnings growth alongside a stable or declining multiple—is the basic setup investors are looking for.
Start With Earnings Growth, Then Check the Valuation
The first step is to identify companies whose earnings are actually growing rather than stocks simply benefiting from investor enthusiasm.
Earnings per share (EPS) is one of the most useful starting points because it measures the portion of a company's profit attributable to each outstanding share. The SEC's Investor.gov defines the P/E ratio as the stock price divided by earnings per share, making EPS directly connected to one of the market's most widely used valuation measures.
Investors can begin by comparing:
- Recent EPS growth against the same quarter a year earlier.
- Full-year earnings growth estimates.
- Revenue growth alongside earnings growth.
- Analysts' forward EPS estimates.
- The direction of earnings revisions.
The last point is particularly important. A company whose earnings estimates are repeatedly being raised can have a stronger fundamental setup than one where reported profits are growing but future estimates are being cut.
FactSet found that analysts actually increased their aggregate Q3 2026 S&P 500 earnings estimates by 1.4% between June 30 and Sept. 30. That contrasts with the historical tendency for estimates to decline during a quarter.
Once earnings growth has been established, valuation becomes the next filter. The forward P/E ratio compares a stock's price with expected future earnings. Investors can compare that multiple with the company's own historical range and with other companies in the same industry. FINRA notes that valuation ratios should be considered against both the broader market and a company's industry because typical multiples vary significantly between sectors.
That prevents a common mistake: calling a stock cheap simply because its P/E is lower than that of a high-growth technology company. A bank, semiconductor manufacturer and software company can have very different normal valuation ranges.
The PEG ratio adds another layer by comparing a P/E multiple with expected earnings growth. It can help identify situations where two companies have similar valuations but substantially different growth rates. Investor.gov also lists PEG as a valuation measure alongside P/E.
Look for Falling Multiples Without Falling Fundamentals
The most interesting candidates are often companies where the valuation is declining while the underlying business remains healthy.
Consider a hypothetical company earning $5 per share with a $150 stock price. Its P/E would be 30. If earnings increase to $7.50 while the stock remains at $150, the P/E falls to 20 without the share price declining. That is the earnings-growth effect on valuation.
The next step is determining whether the earnings increase is durable.
Investors can examine operating margins, free cash flow, debt, share counts and revenue growth. Rising EPS caused primarily by aggressive share buybacks can look different from EPS growth driven by higher sales and expanding profitability.
Debt also matters. FINRA identifies debt-to-equity as one of the key ratios investors can use when evaluating a company's financial position.
A useful screen therefore combines several signals rather than relying on one number:
1. Earnings growth: Look for positive year-over-year EPS growth and credible forward estimates.
2. Estimate revisions: Favor companies where analysts are maintaining or raising earnings expectations rather than consistently cutting them.
3. Forward P/E: Compare the multiple with the company's own history and relevant industry peers.
4. Revenue and margins: Check whether earnings growth is supported by genuine business expansion and improving profitability.
5. Cash flow: Compare accounting earnings with operating and free cash flow to determine whether profits are translating into cash.
6. Balance sheet: Review debt levels and interest costs before treating a low valuation as an opportunity.
7. Share count: Determine whether EPS growth is being helped materially by buybacks.
This approach can also uncover why a stock has become cheaper. A declining P/E may reflect improving earnings expectations, but it can also signal that investors expect future growth to weaken.
That distinction is critical.
Wealthier Today's recent coverage of stocks trading below historical valuations illustrates why a low multiple alone is not enough. Microsoft Corp. (NASDAQ: MSFT) and Alphabet Inc. (NASDAQ: GOOGL), for example, have recently been discussed in the context of valuation discounts alongside continuing business growth.
The same principle applies to the broader market. Goldman Sachs Research said in May that the 2026 US stock-market advance had been driven primarily by corporate profit growth rather than expanding valuation multiples, with its strategists expecting the valuation multiple to remain around 21 times earnings.
That makes earnings revisions particularly important during the current earnings season. FactSet's latest data showed analysts entering Q3 with unusually strong expectations, while the S&P 500's forward P/E had moved below its five-year average.
Investors can then compare individual candidates against the broader stock market valuation backdrop rather than evaluating each company in isolation.
For investors building a long-term portfolio, this process should also be considered alongside diversification and risk tolerance rather than used as a standalone buy signal. Wealthier Today's guide to best long-term investments outlines why individual stocks can offer growth potential while carrying more concentration risk than diversified funds.
The goal is therefore not simply to find the lowest P/E stocks. It is to find companies where earnings are moving higher, expectations remain supported, and the price investors are paying for those earnings is becoming more reasonable.