Viewed through the prism of absolute PE’s the US (like most markets) has witnessed a rollercoaster in PE valuations since hitting a peak in April 2021. Exhibit 1 shows the rotation in regional PEs over the last five years. Exhibit 2 quantifies the scale of the derating encountered between April 2021 to the low reached in October last year and then the scale of the PE expansion across most regions since then.
The US has consistently maintained a higher PE compared to its regional peers.
Exhibit 1: Regional 12M PE ratios.
Source: Factset
Exhibit 2: Quantifying the PE shift from the April 2021 high
Source: Factset
Mind the gap– the US PE relative could be suffering from vertigo
PE relative analysis measures the spread between the valuation of one region with another. Exhibit 3 shows the spread between the valuation of the US market and the World ex US. It shows that the US PE relative traded at a large discount in 1989 (point 1) largely due the valuation attached to Japanese equities. The structural relative re-rating for the US that started in the mid 1990’s (point 2 to 3) was driven by the combination of ‘goldilocks’ economics and the TMT bubble, this pushed US valuations to a 40% premium. However, because of the Global Financial Crisis Crash the US equity valuation premium eroded reaching parity in 2009.Since then the US has seen a sequential P E relative expansion (driven by accommodative monetary policy and tech stock dominance) moving to a 53% premium by December 2021 (point5).
Is this as high as the PE relative will get this cycle? Despite the recovery in absolute valuations from the October low the US PE relative has narrowed to 43%.
Exhibit 3: Mapping the phases in US PE relative movement
Source: Factset
MM-398643 E0823
