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Are U.S. Stocks Grossly Overvalued?

By Michael KramerMarket OverviewSep 17, 2021 04:21AM ET
www.investing.com/analysis/are-us-stocks-grossly-overvalued-200602191
Are U.S. Stocks Grossly Overvalued?
By Michael Kramer   |  Sep 17, 2021 04:21AM ET
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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?
 

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Are U.S. Stocks Grossly Overvalued?

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Comments (34)
Elba Zavala
Elba Zavala Sep 21, 2021 8:08PM ET
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any thoughts about cei?
William Bailey
William Bailey Sep 20, 2021 10:27AM ET
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No more free credit to corporations = 50-80 percent drop over the next 3 months
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 19, 2021 9:08PM ET
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not for those who have not yet made money in stocks. they will get suckered into stocks and others that buy low Sell lower
Billy Bilnaad
Billy Bilnaad Sep 19, 2021 11:49AM ET
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Bipin Kochar
Bipin Kochar Sep 19, 2021 10:26AM ET
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Valuations for tech stocks have zoomed up during the pandemic - Germany, Japan have few tech stocks in their indices and hence do seem to be cheaper - however, the right way to compare would be sector wise -
Ethan Strong
Ethan Strong Sep 18, 2021 6:39PM ET
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yes
Honest Abe
HonestyPays Sep 17, 2021 1:30PM ET
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grossly!
Jatin Yadav
Jatin Yadav Sep 17, 2021 1:13PM ET
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US Market cannot be compared with Japan and Germany.
Gerald Joshua
Gerald Joshua Sep 17, 2021 1:05PM ET
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Not sure if that's even a good idea to compare US with Japan or Germany. They don't have the innovation like US does (Tesla/SpaceX, Amazon - AWS and its space x copy cat, Google with their AI and quantum computing, etc.). Even if they do, the impact is not as big as US. Plus Japan has been focusing too much on hardware where the real leverage is in software business. So yeah, there might be a correction, but in the long run, as long as US keeps innovating, most money managers will put their money here. Most tech companies outside US don't have the time or capital to do deep research for their innovation. So they'll end up using US' vaccine, cloud server, AI model, etc.
Michael Lynch
Michael Lynch Sep 17, 2021 12:59PM ET
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When the headline is in the form of a question, the article should answer it.
Henrique Deutsch
Henrique Deutsch Sep 17, 2021 12:55PM ET
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another "correction" on the way ?
James Hilliard
James Hilliard Sep 17, 2021 12:54PM ET
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Nope. the dollar is still very over valued. It is easily printed. Try printing a Tesla as easily. Or a hamburger.
Emmanuel Boakye
Emmanuel Boakye Sep 17, 2021 12:38PM ET
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can someone tell the answer
Anthony Fig
Anthony Fig Sep 17, 2021 12:36PM ET
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Is that a rhetorical question?
Emmanuel Boakye
Emmanuel Boakye Sep 17, 2021 12:35PM ET
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don't know
ECL SALES
ECL SALES Sep 17, 2021 12:26PM ET
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Ask Robert Shiller.
Hi Hi
Hi Hi Sep 17, 2021 12:17PM ET
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QE,, period.
David Astro
David Astro Sep 17, 2021 12:16PM ET
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Im new here, but arent stocks just built up and up until a big crash, then restart the cycle again?
ECL SALES
ECL SALES Sep 17, 2021 12:16PM ET
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Yeah, agreed. It's boom and bust generally. And it's normal. And it's caused by FED QE & ZIRP. But all is good in these cycles, until something bad happens like the Great Depression or hyper inflation.
ECL SALES
ECL SALES Sep 17, 2021 12:16PM ET
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About to be resolved by eod!
Rafael Evora Martorell
Rafael Evora Martorell Sep 17, 2021 12:11PM ET
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Agree with Quant Casper. I dont know about Asia but Europe dont have nearly same potential as US.
Billy Foos
Billy Foos Sep 17, 2021 12:09PM ET
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Ita about to settlle up.. I would be in cash right now
Quant Casper
Quant Casper Sep 17, 2021 12:08PM ET
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US stocks are grossly favorable and most popular. This will remain until something else Is proven.
Quant Casper
Quant Casper Sep 17, 2021 12:05PM ET
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It's not a valuation thing, rather liquidity. This Is created much by HFT wallstreet and rest of the world. US has by far the most Intresting selection of companies with most future potential.
Anthony Li
Anthony Li Sep 17, 2021 12:05PM ET
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This article is the biggest waste of time
Albert Miller
Albert Miller Sep 17, 2021 12:04PM ET
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Discount 5.2%/y inflation from p/e then check , mostly fair priced
 
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