The U.S. stock market is trading at record highs, raising concerns that valuations may be overstretched compared with global peers.
However, in a note on Friday, analysts at Capital Economics said that while the gap is clear, it is not as severe as it first appears.
“The U.S. stock market is at an all-time high, thanks in part to rapid earnings growth and expectations for that to continue,” the firm wrote in a note.
“But rising valuations have also played their part, to the point where U.S. equity valuations look, at face value, increasingly stretched relative to those elsewhere.”
However, using data from its newly launched Equities Dashboard, Capital Economics argued that some of the gap is justified.
“The valuation gap between U.S. stocks and those elsewhere is smaller than it may seem at first glance, and partly reflects ‘fundamental’ differences,” the analysts said.
They outlined factors that help explain why the MSCI USA index “may justifiably command a higher valuation than indices elsewhere.”
The factors include investors paying for long-term growth rather than a premium, the MSCI being skewed towards sectors that attract high valuations, a broadly stable and transparent regulatory environment, relatively low volatility and the dominant size of the US market.
“If we control for sector composition, the MSCI USA index looks less highly valued,” said the firm.
Looking ahead, Capital Economics expects these dynamics to endure. “Our view is that these differences will persist and help U.S. equities outperform those in most other places over the coming years,” the analysts wrote.
Source :
https://www.investing.com/news/stock-market-news/are-american-stocks-overpriced-compared-to-international-peers-4216703
