Nat Kellogg, CFA
President, Director of Manager Search
This week’s Chart of the Week looks at U.S. (measured by the S&P 500) and Developed International (measured by the MSCI EAFE) equity market valuations. Over the last five years U.S. equity markets have outperformed their developed market peers by almost 10% on an annualized basis (14% vs. 5.3%). Perhaps most surprising is that, as this week’s chart shows, U.S. markets trade at only a modest premium to other developed market peers (16.5 price to earnings ratio for U.S. stocks versus 14.9 for developed market international stocks). However, non-U.S. stocks are actually much cheaper when normalized for profit margins. Profit margins have a strong tendency to mean revert over time (high profits attract competition which drives down profit margins) and U.S. profit margins, at 9.5%, are at an all-time high. Conversely, non-U.S. developed market profit margins are just 6.6%, below their long-term average. Not since 2009 have international profit margins exceeded U.S. profit margins.1 Investors should be aware that as profit margins revert to their long-term averages it could leave U.S. stocks looking pricy, and their developed market peers looking cheap.
1This is shown in the graph when the red area (EAFE profit margins) completely covers the blue area (S&P 500 profit margins).
Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.
We respect your privacy. We will never share or sell your information.
If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.Contact Us >