Equity Valuations are Reflecting the Divergent Macro Picture
Our chart is based on a broad range of valuation metrics (enterprise value to earnings before interest, tax, depreciation and amortization and to sales, price to book, price to earnings, cyclically-adjusted price-to-earnings, price to dividends and price to free cash flow measures) for each index. It computes their historical percentile and then averages across each of these metrics to get an average valuation percentile. A measure above (resp. below) 50% indicates higher (resp. lower) valuations than the historical average.
As we can see, valuation metrics have become more dispersed across equity indices, reflecting the diverging macro picture. The US stands out especially, as across a range of valuation metrics, it’s quite expensive relative to its own history as well as cross-sectionally. But, as we saw last week with the Q1 2019 GDP numbers in the US, growth there remains quite healthy whereas other economies like the Eurozone are seeing risks tilted to the downside.
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