When it comes to valuation, many people focus only on the price-to-earnings ratio. In reality, that accounts for only half the picture; the other half is interest rates.

How much a sum of money is worth ultimately comes down to discounting future cash flows back to the present, and the anchor for the discount rate is the risk-free rate.

When interest rates move, the denominator for every asset in the world has to be recalculated. Most people simply never look at that denominator.

September was quite eventful. On September 16, the Federal Reserve raised rates by 25 basis points, its first rate hike in more than three years, bringing the federal funds rate to 3.75-4. The decision was unanimously approved by the committee, which also said another hike was possible. The three-month Treasury yield was 4.08, the two-year yield was 4.7, and the ten-year yield briefly returned to 5. Europe joined in as well: on September 10, the European Central Bank raised rates, bringing the deposit rate to 2.5. This was already the second hike within three months, as eurozone inflation had surged to 3.3.

Put these numbers together, and the interesting part becomes clear.

If you put your money into short-term Treasuries and do nothing, you earn 4% a year. That is equivalent to an asset trading at roughly 25 times earnings, except those earnings will never grow and will never incur a loss.

The broad U.S. stock market is trading at a forward P/E of around 19, implying a yield of 5.2. Compared with the ten-year Treasury yield of 5, that is only a 20-basis-point premium.

You are earning only slightly more than Treasuries while still taking on the risk of disappointing earnings and a major stock-price decline.

So the odds of making money by counting on further valuation expansion are already very low. From here, making money will depend on the numerator—in other words, on profits actually growing.

Compare it with Treasuries. If the difference is too small and the business is mediocre, it is not very meaningful.

If the difference is substantial and profits can still grow, then it is worth taking a serious look!