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US Equities’ Valuations Remain Lofty: How Come?

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The hard truth is that although rising valuations can continue a while longer, particularly if the European Central Bank (or ECB) or Bank of Japan (or BoJ) add to their own quantitative easing programs, valuations, especially those for US equities, are already high. Since September 30, the trailing price-to-earnings ratio on the S&P 500 has risen by 10 percent, and at roughly 18 times trailing earnings, US multiples are now back to the same level where the market peaked this summer, according to Bloomberg data.

Valuations on US Equities Remain Lofty

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Market Realist – Valuations on US equities remain lofty relative to other developed markets.

US equities are trading at a premium on the price-to-book metric as well. The graph above compares the price-to-book ratio of the S&P 500 index (SPHQ)(IVV) with that of the MSCI EMU Index (EZU), which tracks stocks from the European Union, the MSCI Japan Index (EWJ), which tracks Japanese stocks (DXJ), and the 15-year averages.

European stocks are trading at a 2.9% premium to their 15-year average based on the price-to-book ratio. Japanese stocks are trading at a 7.4% discount to their 15-year average. Meanwhile, the S&P 500 is trading at a 5.5% premium to its long-term average as of October 23.

With the Fed likely to delay liftoff, the dollar (VTVT) isn’t likely to strengthen. In order to weaken their respective currencies and boost exports, the European Central Bank and the Bank of Japan are likely to augment their respective quantitative easing programs.

As developed markets (EFA) continue to see excess liquidity, their stocks could keep outperforming their US counterparts. The latter face a number of headwinds, including weak earnings growth and lofty valuations. In the next part of this series, we’ll discuss how valuations and earnings are likely to affect US equities in the short term.

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