① The U.S. stock market is “feasting” on the Federal Reserve’s procyclical easing policy – in the process, reclaiming the title of the world’s highest-valued market; ② Although the risk of a pullback due to being overextended remains, this alone may not be sufficient to trigger a sell-off in U.S. equities, as their risk-adjusted returns are still lower than those of many global markets.
Cailian Press, September 24 (Edited by Xiaoxiang) – The U.S. stock market is “feasting” on the Federal Reserve’s procyclical easing policy – in the process, reclaiming the title of the world’s highest-valued market. And although the risk of a pullback due to being overextended remains, this alone may not be sufficient to trigger a sell-off in U.S. equities, as their risk-adjusted returns are still lower than those of many global markets.
The following chart illustrates the trend of the MSCI World Index (ACWI) and uses color coding to indicate which market holds the highest three-month smoothed price-to-earnings ratio within the MSCI indices denominated in U.S. dollars during a specific period.
As shown in the chart, India’s stock market (in black) has long dominated the top position over recent years. Despite repeated exposure to downside risks due to overvaluation during this time, it has consistently found strong support.
However, around the period before and after Trump’s election as president last year, the U.S. market briefly regained the lead in this valuation ranking and maintained its position during the tariff disputes in the first half of this year. After the U.S. market began to experience volatility several months into the imposition of tariffs, India’s market reclaimed the top spot in June, only to be quickly replaced by Bulgaria’s stock market.
But as of last week, the U.S. stock market had once again claimed the “holy grail” of the most expensive valuations globally – though this may well turn out to be a poisoned chalice.
Notably, the U.S. stock market is not only the most highly valued globally but also at elevated levels compared to its own historical standards. The S&P 500’s price-to-earnings ratio has now surpassed the high point seen in February this year, and its cyclically adjusted price-to-earnings ratio (CAPE) has reached the 98th percentile of nearly 150 years of historical statistical data.
Of course, as macro strategist Simon White pointed out, merely highlighting the level of valuations does not predict when they will retreat.
White noted that if U.S. equities were in an overbought condition, concerns might be more pressing. However, their risk-adjusted returns are not significantly elevated – whether compared to their own historical levels or, more crucially, in relation to other global assets.
As shown in the chart below, the one-year risk-adjusted returns of the S&P 500 and the U.S. technology sector are only in the middle range among global assets. Gold and Bitcoin currently exhibit the highest return-to-risk ratios, while the S&P 500’s ratio is less than 1x, and the Nasdaq’s is approximately 1x.
A high return-to-risk ratio often signals a sharp price reversal, as the low volatility accompanying returns usually contains the seeds of ‘self-destruction,’ which could ultimately lead to disorderly sell-offs.
White noted that there are currently no clear warning signs of an imminent significant decline in U.S. equities; however, several factors still warrant investor vigilance regarding potential risks—particularly their globally unmatched valuation levels.
