By Philip Lawlor, head of Global Investment Research
Based on most traditional metrics and their own history, US valuations look elevated — both on their face and relative to their global peers. But there are some solid reasons why investors may be partial to US stocks now.
As shown below, current forward P/E multiples are above their 10-year averages across global markets, but particularly so for the Russell 1000 (red shade). The valuation gap between the US large-cap index and its peers is even more acute on a relative basis. The US premium versus the global index is well above its long-term norm, while the rest of the world’s markets all carry deeper discounts (green shade).
Regional 12-month forward P/E comparisons
Source: FTSE Russell / Refinitiv. Data as of May 18, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
Superior US profitability
However, the standout status of US valuations becomes clearer when parsing underlying profit profiles across markets. As illustrated below, the 12-month forward return on equity (ROE) of the FTSE USA is 17.8%, well above the FTSE World’s 13.8% and those of all other markets, offering a strong explanation for its large price/book value premium. The US index’s larger exposure to highly profitable technology sector adds further justification.
Regional 12-month forward price/book value (×) vs return on equity (%)
Source: FTSE Russell / Refinitiv. Data as of May 18, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
A speedier US earnings recovery
Another defense comes from the far more robust post-lockdown EPS recovery in the US than in the rest of the world, as shown below. The recent upward revision cycle has catapulted forward EPS forecasts to a new five-year peak for the Russell 1000 (along with the FTSE Emerging), while those elsewhere still have some catching up to do.
Regional 12-month forward EPS forecasts (rebased)
Source: FTSE Russell / Refinitiv. Data through May 18, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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