By Philip Lawlor, head of Global Markets Research
The epic rally since late March has propelled forward PE multiples across the developed equity markets to some of the highest levels in years. Price/book value ratios have also rebounded, albeit less profoundly. In both cases, the Russell 1000 has set the pace.
Russell 1000 PE hits 15-year high and a big premium
The nearly eight-point rebound in the Russell 1000 forward PE off its March lows has far outdistanced the average five-point gain for its developed peers. At a forward PE of 21.8×, the US large cap index has not only blasted through its mid-February peak but also through its 15-year high. This is also one of the US large cap index’s largest premiums to other developed markets, which have converged around 15-16×.
Regional consensus 12-month forward price/earnings multiples (×)
Source: FTSE Russell / Refinitiv. Data through June 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Like its developed peers, the Russell 1000’s price/book value ratio has not fully recouped its pre-pandemic peak. However, at 3.2×, this metric rivals some of its highest levels of the past 15 years, while P/Bs elsewhere remain close to their Global Financial Crisis lows. As a result, the gap between the US and other developed indexes has widened significantly.
Regional consensus 12-month forward price/book value (P/B) multiples (×)
Source: FTSE Russell / Refinitiv. Data through June 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
By these two metrics, US stocks appear expensive, historically and in absolute and relative terms. However, when examined more comprehensively, they look far less stretched than many may think.
Broader view tells a different story
To illustrate, we point to the Valuation Composite scores for the Russell 1000 (blue line) and the FTSE Europe ex UK Index (gray line) since 2000. We derive these composites using a Z-score methodology to measure the number of standard deviations for seven traditional valuation metrics (including ROE) versus their long-term historical averages. Scores range from 1 (low) to 5 (high).
As shown, the valuation composite scores for both the Russell 1000 and the FTSE Europe ex UK have rebounded from their late March lows to roughly comparable levels of just under 4 currently, exceeding their average scores of around 3 since 2013 but below 15-year peaks.
Russell 1000 and FTSE Europe ex UK composite valuation Z-scores
Source: FTSE Russell / Refinitiv. Data through June 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
For a more granular view, the heat map below shows how each of the seven valuation inputs currently measure up across regions. The Russell 1000 ranks notably higher than its peers based on price/book, sales and cash flow (with scores of 4). The FTSE Europe ex UK (along with the FTSE UK) ranks highest on price/EPS growth or PEG (with scores of 5). Emerging markets look the least expensive of the six indexes, with a composite of 2.9, mostly reflecting a lower price/cash flow score than most of its peers.
Regional Valuation Heat Map–Combined
Source: FTSE Russell / Refinitiv. Data as of June 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Photo Credit: john.purvis via Flickr Creative Commons
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