Why some UK sectors command premium valuations while others trade at a discount
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Some parts of the UK stock market trade at a premium price to earnings or PE ratio while others trade at a discount to the market. While there are many factors which can influence the PE ratio, this article explains the most prevalent reasons and reveals the sectors with the highest/lowest PEs.
Before that, it is worth asking what the PE ratio is and why it is a popular measure.
The PE ratio is calculated by dividing the stock price by earnings per share.
Markets are forward looking, so investors often use analysts’ forecast earnings over the next 12-months, rather than historical or trailing earnings, to calculate the PE.
Trailing PE = share price / last 12-months earnings per share.
Forward PE = share price / next 12-months earnings per share estimate.
Example: Rolls Royce
Price £14.82 / 2025 EPS 59.2p = trailing PE of 25
Price £14.82 / 2026 expected EPS 42.6p = forward PE of 34.8
The simplicity of the PE ratio is what makes it a popular measure with investors looking to determine how a stock is priced relative to its earnings potential.
Essentially, the PE tells you how many years of current earnings you are paying to own the stock at the current price. Its meaning comes from what it implies about growth, risk and quality of earnings.
A high PE ratio can reflect strong growth expectations or investor confidence while a low PE may signal lower growth or underlying concerns about the business.
A stock’s PE can be contextualised by comparing it with its historical range, industry peers and the broader market.
A disadvantage of the PE is that it is meaningless when earnings are negative or when they are heavily distorted by one-off items. It is also less meaningful for cyclical industries which generate volatile earnings.
Finally, it is also worth pointing out that single valuation measures like the PE should never be used in isolation. It is a starting point for further research not a reliable signal of whether an investment will prove a success or failure.
Why the PE is not a good measure for banks
Banks make up a significant proportion of the FTSE 350 index, representing around a fifth of the market. Unfortunately, the PE ratio is less useful a measure for banks because earnings are distorted by high leverage and provisioning cycles for non-performing or bad loans.
This is why they are often valued by price to tangible equity or ‘through cycle’ PE ratios. A premium to tangible book value is supported by higher returns on equity.
Bank earnings can easily be wiped out by a bad year because they carry a low equity buffer compared to companies in other sectors.
Example: Lloyds Bank
Lloyds had total assets of £944 billion in 2025 and equity of £48 billion, which means assets were roughly 20 times larger.
Roughly 95% of Lloyds’ balance sheet is funded by liabilities (mostly customer deposits and wholesale funding), with only about a 5% equity cushion absorbing losses.
Equity to assets = 5.1% (48/944) equating to leverage of 19.7 times.
This means a small percentage move in asset quality (loan losses, impairments) translates into a large percentage move in equity and earnings.
It is worth highlighting that banks are allowed to risk-weight their assets and on this basis all UK banks are comfortably above the regulatory minimum capital requirements and generating surplus capital.
This explains why Lloyds and other UK banks have been buying back shares and paying healthy dividends in recent years.
Why the technology sector trades at a premium
The most important factor determining the PE ratio is the expected earnings growth rate with higher growth firms commanding higher PE multiples.
As the table shows, the technology sector trades at a premium to the market, implying investors are willing to pay a higher multiple of earnings because they anticipate a higher growth rate.
This means more value is coming from distant earnings rather than near term earnings and this makes high PE more interest rate sensitive than lower PE firms.
A recent example is 2022 when central banks pushed up official interest rates to fight rising inflation coming out of the pandemic. Many technology and biotech companies underperformed the market during this period, leading to a compression of PE ratios.
In addition to superior earnings growth, technology companies tend to have higher-than-average operating margins of between 20% and 30%, which supports higher PEs.
Valued-added IT reseller Computacenter has outperformed some of the largest US technology firms over the last two years driven by strong demand from the AI boom at its US division which supplies technology to hyperscalers.
Analysts have struggled to keep up with business momentum which can be seen in the strong earnings revisions trend with consensus earnings estimates around 20% higher than they were a year ago.
Historically, Computacenter has grown its earnings at a modest growth rate of around 8% a year, but with the company experiencing a growth surge, investors have pushed the PE to around 22 compared with 14 times it traded at in 2022, prior to the emergence of generative AI. With its first-half results in September 2026 spurring another round of upgrades.
Although accounting software provider Sage trades at a premium to the market, it sits at the lower end of the technology sector due to fears that AI could disrupt its business model.
These fears have subsided in recent months as the market has reassessed the threat from AI and companies like Sage have articulated a strategy to embed autonomous AI agents directly into its platform.
Raspberry Pi has experienced a rollercoaster ride since floating on the stock market in 2024.
After rallying to almost 800p post-IPO (initial public offering) the shares dropped back below the 280p issue price in 2025 as investors feared margin pressures from higher memory component costs.
These fears were quicky extinguished in early 2026 when it became clear that industrial demand had become a key driver for the company as corporations embed Raspberry Pi’s high-end, low-power boards to host AI-assistants.
First-half adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) nearly doubled, triggering a massive recovery in the shares to more than £10, before profit taking took the shares back to around 600p.
Oil companies on single digit PEs
Oil giants Shell and BP sit at the opposite end of the valuation spectrum with single-digit PEs representing a 40% discount to the market. This may seem counter-intuitive when 2026 earnings are projected to almost double, as higher oil and gas prices related to the US-Iran war feed through to profits.
The reason is that markets are anticipating that the surge in profits will prove a one-off with analysts calling for them to fall 2027.
This relatively high earnings uncertainty and the fact that oil companies cannot control prices is why the market has consistently ascribed a PE discount to the sector.
Generally, economically sensitive sectors which suffer from wide swings in profitability through the cycle tend to trade on PEs lower than the market. BP trades on a lower PE than Shell due to it carrying a higher debt burden, although management has initiated a plan to get borrowings down.
Capital intensive, cyclical or highly leveraged sectors like banks, miners and airlines tend to trade on lower PEs for these reasons. In these sectors high PEs can indicate trough earnings and low PEs can indicate peak earnings.
Dizzy heights for defence sector
The aerospace and defence sector trades at a significant valuation premium, representing a decoupling from history where the sector has traditionally traded in line with or slightly below the market PE.
This reflects a step-change in military spending amid a rearmament of UK and European countries following pressure from the US to boost spending as a percentage of GDP.
BAE Systems recently flagged a record order book as it continues to benefit from strong munitions demand from the US and Britain pushed ahead with submarine and fighter jet programmes.
The company provides the US with combat vehicles, electronic warfare systems and space capabilities, and has seen its order book almost double since Russia invaded Ukraine in 2022.
Meanwhile, a combination of recovering civil aviation and a growing defence order book has benefited defence/civil aerospace hybrid Rolls-Royce which has a forward PE of 34.7 times.
The sector re-rating may turn out to be durable as orders reflect multi-year government commitments but there is also a risk that investor expectations have run ahead of the delivery of profits.
This makes the PEs vulnerable to a change in sentiment if the rearmament narrative decelerates.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...