Global stocks are looking increasingly cheap, with one glaring exception — the US. You can buy three-quarters of the world’s GDP for a price/earnings ratio below 10, noted Research Affiliates’ Rob Arnott recently, with valuations in Europe and emerging markets now at “bargain levels”. However, Arnott warns that the US still trades on a cyclically adjusted price-earnings (Cape) ratio of 28.
Yes, that’s a big drop from January (38). However, it’s “almost identical” to levels seen at the 2007 market top before the global financial crisis.
In other words, 2022′s brutal bear market has only brought valuations down to levels matching an infamous market peak.
The Cape is only one valuation metric, so what do others say? JPMorgan’a latest Quarterly Guide to the Markets looks at six metrics — forward price/earnings ratio, Cape, dividend yield, price/book ratio, price to cash flow, and earnings yield spread — and compares current valuations to their 25-year average.
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Today’s forward p/e ratio (15.15) is cheaper than its 25-year average (16.84). However, the other five metrics are all almost exactly in line with their 25-year average — two suggest stocks are slightly undervalued, three slightly overvalued.
So US stocks don’t look pricey, but nor do they look cheap, even after losing a quarter of their value this year. Given increased likelihood of a global recession, that should concern investors.
