Breaking News
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Are U.S. Stocks Grossly Overvalued?

By Michael KramerMarket OverviewSep 17, 2021 04:21
ca.investing.com/analysis/are-us-stocks-grossly-overvalued-200488012
Are U.S. Stocks Grossly Overvalued?
By Michael Kramer   |  Sep 17, 2021 04:21
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com.

Stocks have had a fantastic run over the past 18 months. It seems that many investors owe much of the credit to low-interest rates, making equities attractive on a relative basis. That has left many with the view that if rates remain low, all will stay well. That may not entirely be the case. Plenty of places in the world have even lower rates, yet valuations have not been rewarded in nearly the same manner. 

Germany and Japan are two such examples. Both of these markets have interest rates lower than the US and both have flirted with near-zero or below zero interest rates for several years. One might think that these markets would have seen the same multiple expansion we have witnessed in the US. But you will be disappointed to learn that Japan and Germany trade with significantly lower equity multiples than the US. 

The US Trades At A Big Premium

As of Sept.16, the S&P 500 trades around 21.2 times its next-twelve-months earnings estimates. That is much higher than Germany’s DAX, which trades for 13.5, and Japan’s Topix, which trades for 15.1 times its next-twelve-months earnings estimates. These lower valuations come despite significantly lower rates in Japan and Germany with 10-year yields of 0.04% and -0.31%, respectively, versus the US 10-year rate of 1.31%.

US 10-Year Treasuries Comparison
US 10-Year Treasuries Comparison

Clearly, the lower bond rates in both countries have not nearly had the same effect on the PE multiple that it is having on the US market. Historically, the US has always traded at a premium to both the German and Japanese markets. But what is interesting is that over the past year, that premium has actually gotten wider. So the lower rates have had absolutely no effect on either the Japanese or German markets. 

Spreads Growing Wider

From 2014 until 2019, the S&P 500’s PE traded with a premium of 3.8 points above the DAX’s PE while trading 2.8 points above the Topix PE. Currently, that spread has widened to 7.7 and 6.1, respectively. Clearly, the low rate environment has not lifted all markets evenly over the past year. 

Growth Not A Factor

One can’t even point to the fact that growth in the US is expected to be faster. It is not. Japan’s Topix is expected to see much faster earnings growth over the next twelve months with estimates for 18.5%, followed by the S&P 500’s 15% and the DAX’s 11.8%. 

Perhaps it is a flight to quality during uncertain times sending investors to the US, looking for the most prominent and safest companies. However, it could also mean that once it is perceived, the world has turned the corner. Allocations could begin to shift away from the safety of the US. Then the US equity market could be somewhat vulnerable to a significant amount of earnings multiple compression. Which could push valuation spreads back to their historical trends. 

One may never know what is really going on here. Still, it seems clear that lower rates do not specifically lift valuations for equity markets because if they did, the US would not carry the highest valuation. It does make one thing very clear, though; the current valuations suggest that either the US is extremely overvalued or Germany and Japan are very cheap. 

Are U.S. Stocks Grossly Overvalued?
 

Related Articles

FactSet Research Systems Inc
Podcast : Financial Market Preview - Friday 22-Oct By FactSet Research Systems Inc - Oct 22, 2021

US futures are indicating a largely flat open as of 05:00 ET. European equity markets are trading higher, following mostly firmer levels in Asia. Evergrande (HK:3333) reportedly...

Are U.S. Stocks Grossly Overvalued?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email