By Philip Lawlor, managing director, Global Markets Research
With global equity benchmarks in bear-market territory, valuations haven’t been this low in years. But given the still-opaque outlook for world economies and earnings, the caveat of “let the buyer beware” remains an apt warning.
Based on 12-month forward EPS forecasts, PE multiples have fallen precipitously across developed markets, wiping out all or more of their gains since December 2018—and at, or approaching, multiyear lows. Notably, the Russell 1000 multiple (at 15.5×) remains well above those of its developed peers, particularly versus the UK, where it sits at 10.2×, in line with levels last seen in 2012.
Even so, forward PEs have yet to plumb the lows touched during the 2008-09 crash or the 2011-12 European sovereign debt crisis.
Regional 12-month-forward price/earnings ratios – round trip to multiyear lows
Cyclically adjusted PEs (CAPEs), based on an average of earnings over rolling 10-year periods to smooth out economic fluctuations, tell a similar story—they have plunged across markets this year. However, the Russell 1000 multiple remains well above those of its developed-market peers, which have converged close to their 2008 crisis levels.
Cyclically adjusted moving-average PE (CAPE) ratios – all but US back near crisis lows
Source: FTSE Russell / Refinitiv. Data through March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The Fed Valuation Model chart below compares equity earnings yields (the inversion of the PE) with their respective 10-year sovereign bond yields. The spread between the two (or the equity risk premium) is more than eight percentage points in Europe, the UK and Japan—at or near 15-year highs for the latter two. Despite the significant uptick, the US equity risk premium, at nearly six percentage points, remains well below its crisis highs and significantly below those of its developed peers.
Equity earnings yield minus 10-year sovereign bond yield—equity risk premiums at multi-year highs.
As we wrote in an earlier blog post, the next big test for markets will likely be the cascade of profit warnings and negative EPS revisions ahead, as investors gain greater clarity about the extent of the pandemic’s impact on economies and earnings. The market response will be a useful gauge of what has already been discounted.
Source: FTSE Russell / Refinitiv. Data through March 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Photo Credit: Zooey via Flickr Creative Commons
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