What is a major downside of a high P/E ratio?

A high P/E ratio can indicate that a company's stock is overvalued relative to its earnings, suggesting that investors are willing to pay a premium for the stock based on expected future growth. However, this premium can lead to a situation where the company doesn’t have earnings that match its high valuation when compared to peers in the same industry.

This implies that while investors may be optimistic about the company's growth potential, the actual earnings figure might lag behind, which could result in a disconnection between stock price and underlying earnings performance. In competitive markets, a high P/E might signal that despite the stock’s appeal, the company's earnings are not as robust as those of similar companies, potentially indicating financial weaknesses or overhyped growth prospects.

Consequently, this indicates that investors should be cautious when interpreting high P/E ratios, as they could reflect unrealistic projections or complacency in actual earnings performance compared to industry standards.