Which of the following indicates that stocks with low price-to-earnings ratios tend to outperform those with high ratios?

The P/E Ratio Effect is a well-documented phenomenon in financial literature that suggests stocks with lower price-to-earnings ratios tend to outperform those with higher P/E ratios over time. This effect is grounded in the belief that stocks with low P/E ratios are often undervalued by the market, possibly due to negative sentiment or unfavorable perceptions. As the market eventually corrects these mispricings, these undervalued stocks can offer significant upside potential, leading to higher returns when compared to their higher P/E ratio counterparts.

Investors frequently utilize this effect as part of their value investing strategy, under the premise that earnings should be the driving force behind stock prices. When a stock is priced low relative to its earnings, it suggests that either the earnings will improve, or the market has misjudged the stock's future prospects, positioning it for better performance.