EU equities valuation

assessing what future earnings EU stocks are pricing-in

Are EU stocks cheap or expensive?

Looking at the Stoxx 600 price/earnings ratio:

• looking at the latest reported earnings, the Stoxx 600 index today has a P/E of 14.5x that looks exactly fair value vs history (this is where the line stands just before the vertical black line)
• looking one quarter ahead into expected consensus earnings (after the black vertical line), the forward P/E is expected to move higher (to 14.9x, as earnings are predicted to fall), and will remain expensive

IntroTo evaluate if an equity index (or individual company) is cheap or expensive, we can use different financial metrics, such as price-to-earnings (P/E) ratio, earnings per share (EPS) and earnings yield (EY). Here we focus on P/E and EY.

MetricsThe P/E (Price-to-Earnings) ratio and Earnings Yield are both financial metrics used to assess the valuation of stocks, but they express the relationship between price and earnings in different ways: the P/E ratio indicates how much investors are willing to pay for each dollar of a company's (or average index) earnings, while earnings yield - the inverse of the P/E ratio - represents the earnings per share (of an index or company) as a percentage of the stock price. In summary, P/E is a price multiple while EY is an expected rate of return.

Market implicationsA high P/E ratio suggests that investors are paying a premium for each dollar of earnings, potentially indicating an excessive valuation or high growth expectations that maybe met in the future, or not. A low P/E ratio suggests instead undervaluation or eventually slower growth to come, which may happen or not.

A higher EY suggests a potentially better return from investing in stocks (=stocks are cheaper vs their value), especially when comparing different investment options, while a lower EY suggests a potentially lower return from stocks (=stocks are more expensive than their value).

US equities valuation

assessing what future earnings US stocks are pricing-in

Are US stocks cheap or expensive?

Looking at the S&P 500 price/earnings ratio:

• based on the latest reported earnings, the S&P500 index has today a P/E of 24.4x that looks expensive
• looking ahead and using future consensus expected earnings, the forward P/E is expected to move lower (to 21.4x, as earnings are predicted to increase), and will therefore settle at fair value (above its median, slightly more expensive than history)

IntroTo evaluate if an equity index (or individual company) is cheap or expensive, we can use different financial metrics, such as price-to-earnings (P/E) ratio, earnings per share (EPS) and earnings yield (EY). Here we focus on P/E and EY.

MetricsThe P/E (Price-to-Earnings) ratio and Earnings Yield are both financial metrics used to assess the valuation of stocks, but they express the relationship between price and earnings in different ways: the P/E ratio indicates how much investors are willing to pay for each dollar of a company's (or average index) earnings, while earnings yield - the inverse of the P/E ratio - represents the earnings per share (of an index or company) as a percentage of the stock price. In summary, P/E is a price multiple while EY is an expected rate of return.

Market implicationsA high P/E ratio suggests that investors are paying a premium for each dollar of earnings, potentially indicating an excessive valuation or high growth expectations that maybe met in the future, or not. A low P/E ratio suggests instead undervaluation or eventually slower growth to come, which may happen or not.

A higher EY suggests a potentially better return from investing in stocks (=stocks are cheaper vs their value), especially when comparing different investment options, while a lower EY suggests a potentially lower return from stocks (=stocks are more expensive than their value).