There’s nothing new about U.S. stock market investors fretting about valuations on Wall Street, but they still may not fully realize how pricey things have gotten relative to the rest of the globe.
According to StarCapital Research, the U.S. has the least affordable equity market in the world, coming in last among the 40 countries and regions it analyzed on a variety of metrics. While the U.S. doesn’t place last on any specific measure, it is among the weakest on all of them, resulting in an average that pushes it down to the bottom of the heap.
While elevated valuations don’t necessarily mean that a selloff is imminent, let alone a recession, academic research “has shown that undervalued equity markets have achieved higher future returns in the long run than their overvalued counterparts, which holds for different valuation measures alike,” Norbert Keimling, head of StarCapital Research, wrote in a report.
On the other end of the scale, South Korea was rated as the number one equity market in terms of its valuation, based on its price-to-earnings and price-to-sales ratios.
For the U.S., the most ominous warning signal may be the cyclically-adjusted price-to-earnings ratio, or CAPE, which compares stock prices with corporate earnings over the past 10 years. On this basis, the U.S. comes in at 28, cheaper than only Denmark (36.1) and Ireland (34.5). In the past, a CAPE ratio at current levels has preceded pronounced market declines.
On a price-to-earnings basis, the U.S. comes in at 22.4, the 10th-highest level in the world, excluding the broader category of developed Europe. While this is a lower ratio than such notable economies as the United Kingdom (the second-most expensive on this metric, with a P/E of 31) and India (22.8), it is a far cry from China’s ratio of 7.4, which is second only to Russia (7.1) for being inexpensive.
For developed markets overall, the CAPE is 23.4 and the P/E is 21.
The U.S. is the second-most expensive country in the world when looking at the price-to-book ratio, a measure where it rates a reading of 3.1. Indonesia is the only country to top the U.S., with its 3.3 ratio. Developed markets as an overall category have a price-to-book measure of 2.1.
As with P/E, Russia and China are the two cheapest countries when looked at on this basis. Russia’s ratio comes in at 0.8 while China’s is 0.9. The two are also among the cheapest regions when considered on a price-to-sales metric, with both posting a P/S of 0.7 that is only behind Italy’s 0.6 ratio.
The U.S. has a price-to-sales ratio of 2.0, the seventh-highest among the 40 regions considered by StarCapital.
The valuations in the U.S. come as major stock-market indexes like the Dow DJIA, -0.38% S&P 500 SPX, -0.06% and Russell 2000 RUT, -0.49% have all hit a series of records this year, thanks in large part to technology XLK, +0.07% and internet stocks. Over the past several years, U.S. markets have risen far more than the stocks in such regions as emerging markets VWO, +0.09% Given the U.S. rally that has already occurred, many analysts are urging investors to consider overseas markets for the next leg high.