11 Nov

Why valuations are stretched in global equity markets

WRITTEN BY Russ Koesterich, CFA

My take: While there are few absolute bargains left anywhere in the equity market and stocks are no longer cheap at the aggregate level, equities at the broad level aren’t so stretched as to suggest that valuation alone is likely to end the bull market.

As I write in my latest Market Perspectives paper, “Has the Bull Market Run Its Course,” although a number of valuation metrics today suggest lower returns over the next five years than enjoyed over the previous five, global valuations are neither indicative of a market top nor at a point that would suggest aggressively lowering equity allocations.

U.S. large cap valuations, for instance, as measured by the price-to-earnings ratio of the S&P 500 index, are slightly below long-term average.

Why valuations are stretched in global equity markets

Market Realist – The graph above shows the price-to-earnings (or P/E) ratio for the S&P 500 (SPY)(IVV) since November 1994. It shows the 20-year average. Although it has been increasing since late 2011, it’s still below the 20-year average of 19.3x. Currently, the S&P 500 is trading at 17.9x its earnings. However, compared to global stocks (QWLD)—particularly emerging markets (EEM)(VWO)—the S&P 500 looks expensive.

In the next part of the series, we’ll explain a few factors that could provide support for stocks.

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