I saw this graph this morning (see full article here) and it does a great job of showing the relative price of US stocks compared to various other countries. The graph is showing CAPE by country (cyclically adjusted price-to-earning ratio). CAPE measures the 10 year average of a company’s P/E ratio – this 10 year average smooths out bumps in the data (ie one quarter of really bad earnings).

Source: https://theideafarm.com/p/1q24-global-valuations?utm_source=theideafarm.com&utm_medium=newsletter&utm_campaign=1q24-global-valuations

Why should you care about P/E? Well, think of it like this: If you wanted to buy two companies. Both companies earned $1 per share on average over the last 10 years. Company A might trade for $20 per share and Company B might trade for $35. Which company would you prefer? It depends! Company B (the “more expensive” company) might have better growth prospects or exciting new products that are expected to translate to higher future earnings. CAPE gives us an interesting way to compare the relative price of different companies (how much are people willing to pay for a stock per $1 of earnings?).

Back to the graph. It shows that stocks in the US have the third highest CAPE ratio in the world. Stated another way, if you were to buy a random basket of stocks in the US, you would be paying a good bit more for those stocks than you would for another random backet of stocks in many other countries.

Is the US overvalued? I don’t know. There are a lot of US companies that have great growth prospects. There are also a lot of foreign companies that are relativley “cheaper” to buy from a CAPE perspective. This is all the more reason to feel good about holding a diversified portfolio of stocks that has both US and international exposure. This allows you to capture returns wherever they may occur in the next 10 years.


  1. Tom Brussat on April 24, 2024 at 12:11 PM

    Would another interesting comparison be to compare the US ratio with time over prior decades? Compared to earlier times, are we these days paying more for less?

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