By Philip Lawlor, head of Global Investment Research
Forward PE multiples hit new decade highs in August amid buoyant risk appetite and recovery hopes for both economies and corporate earnings. History offers some perspective on how best to interpret this move.
PE multiples across markets have not only surpassed their pre-COVID levels of early February but are also at or above their 10-year highs. As the chart below shows, the run-up in the Russell 1000 multiple since March has been most pronounced. At a forward PE of 22.9×, the Russell 1000 is roughly even with its 15-year peak and retains a huge premium to those of its developed peers, which have converged between 15× and 17×.
Regional 12-month forward price/earnings ratio (×)
Source: FTSE Russell / Refinitiv. Data through August 17, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Significant PE dispersion accompanies US re-rating
The most striking feature of the US equity rally and valuation shifts has been the profound outperformance of technology and media stocks. We see this impact in measures of dispersion between the top and bottom quintile of US PE multiples.
As shown below, the difference between the most expensive and cheapest quintiles of US stocks, based on 12-month forward PEs, is wider than it’s been since the 1980s, even in late-1990s tech bubble.
Spread between top and bottom quintile of 12M forward PEs within FTSE USA Index
Source: FTSE Russell / Refinitiv. Data through August 17, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Another observation: EM vs DM at rare "double discount"
Despite a strong rebound, the emerging-markets' forward PE discount to developed peers remains exceptionally large (around 25%), likely a major catalyst of the former’s recent outperformance. However, even when applying equal sector weights to both indexes, the discount is halved to around 12%. Based on either metric, over the past decade, the EM discount has rarely been as wide as it is today.
Emerging vs. developed markets 12-month forward PEs (×)—two views
Source: FTSE Russell / Refinitiv. Data through August 14, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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