By Jared Blikre

Tech investors are paying a lot less for growth. The growth itself is still showing up.

A year ago, investors paid roughly 35% more for a dollar of expected tech earnings than for a dollar of S&P 500 earnings. Today, that premium is about 10%.

That comparison comes from forward price-to-earnings ratios, or forward P/E — the price investors pay today relative to the profits Wall Street expects over the next year.

Bloomberg, Yahoo Finance

That's encouraging for investors, with one catch. Cheaper only helps if the earnings investors are paying for are still there. So far, they are.

The move also looks less strange once you zoom out.

For years after the financial crisis, tech and the broader market traded at roughly similar forward P/E ratios. FactSet noted in 2018 that their average multiples over the prior nine years were nearly the same before tech began pulling away in 2017.

Bloomberg, Yahoo Finance

There were good reasons investors started paying up.

The shift toward cloud computing in the teens gave many tech companies faster growth, recurring revenue, and fatter margins. More recently, the AI build-out has unleashed another huge wave of spending and growth.

The pandemic widened the gap further as investors chased businesses tied to an accelerated digital economy. By December 2020, tech traded around 26.4 times expected earnings, versus 22 times for the S&P 500.

Now much of that extra price has come out, while corporate profits keep climbing. In his TKer newsletter, Sam Ro has long argued that earnings and expectations for earnings growth are the most important long-term drivers of stock prices.

Ro's Aug. 6 note pointed to robust sales growth, expanding profit margins, and rising earnings estimates as evidence that the business backdrop remains strong.

That leaves tech investors paying a much smaller premium for an earnings stream that is still delivering.

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Ro also quotes Truist's Keith Lerner, who puts it simply, "Earnings continue to underpin equities."

Jared Blikre is the global markets and data editor for Yahoo Finance. Follow him on X at @SPYJared or email him at jaredblikre@yahooinc.com.

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