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On Tuesday morning we examined whether it was fair to assert, as GMO’s Hawaiian-shirted James Montier has done, that US stocks are absurdly overvalued relative to their European counterparts.
FT Alphaville’s conclusion? In a word: no.
In fact, when we looked at European stocks on a sector basis, rather than as an aggregate, they seemed more expensive than their US equivalents.
After the post went online in Tuesday’s wee hours, a reader got in touch with a few more data-points that we thought were worth sharing. Put together by Ross Yarrow, Managing Director of US Equities at Baird, the numbers only serve to underline the point about sectoral composition.
First off, take a look at how the median price-to-earnings ratio for each European sector stacks up against its American counterpart. (Many thanks to Ross for updating these charts; the ones we received earlier were from May.)
And their respective weightings:
As you can see clearly, Europe’s equity market has a higher weighting towards the cheaper sectors — whether that be banking, utilities or industrials — than the US.
The question is though, what difference does this make on a quantitative level? Well, no need to ask because Ross also provided us with this excellent table which rebalances both equity markets — US and EU — so they have each other’s respective weightings:
They key numbers to look at here are the two at the bottom of the table on the far-right-hand side. As you can see, if the US had the EU’s sector weightings, its median price-to-earnings ratio would be 21.9 times, just one turn higher than Europe and a turn below its current level.
Yet, perhaps more surprisingly, if Europe had the US’s sector weightings it would trade at 23 times earnings, one turn higher than the US.
So no matter which way you spin it, whether on a company-by-company or on a sector-by-sector basis, it’s pretty difficult to argue that American stocks are particularly pricey at the moment.
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