Since the beginning of 2023 (through January 25, 2023), many international equity markets have outperformed the U.S. market. There have been reports in the media about the attractiveness of international equity markets. The arguments for international equities tend to go as follows:

  • International markets are cheaper than the U.S.,
  • European GDP growth is not falling off a cliff, and
  • Inflation is falling which implies that the Fed, in all likelihood, will be reducing rate hikes and the tradeweighted dollar which has been weakening since October 2022 will continue to weaken.


To address one of these arguments: do international equities look cheap relative to U.S. equities? Below are charts of valuation of regions relative to the U.S. For the valuation 1 metrics, each region is displayed as a ratio of the region’s valuation (trailing price-to-earnings or forecasted price-to-earnings) relative to the U.S. The U.S. is in the denominator.

In terms of trailing P/E, most regions outside the U.S. have tended to trade below the U.S. over the last decade. Europe (ex UK) has been trading at a discount relative to the US market pretty consistently since June 2015, the UK has been trading at a discount since Sept. 2017, Japan at a discount since November 2013, and Emerging Markets since September 2010. In other words, most of the international regions have been trading a trailing P/E discount to the US through most of the U.S. mega-cap market dominance between 2015 and 2021.


Similarly for forecasted P/E, Europe (ex UK) has historically traded below the forecasted P/E for the US since 1995 but since March 2015 has traded systematically below the U.S. valuation. The UK has been trading at a discount since November 2016 with the discount getting larger over the last 5 years, Japan at a discount since April 2013, and Emerging Markets since July 2011.


Currently all the international regions displayed are trading at a discount to the US equity market. Much of the divergence in the last 5 years was due to U.S. mega-cap outperformance. It does offer the opportunity for the international valuations in the future to revert closer to par with the valuations of the U.S. market through relative price appreciation.


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In terms of trailing P/E, most regions outside the U.S. have tended to trade below the U.S. over the last decade.  Europe (ex UK) has been trading at a discount relative to the US market pretty consistently since June 2015, the UK has been trading at a discount  since Sept. 2017,  Japan at a discount since November 2013, and Emerging Markets since September 2010.  In other words, most of the international regions have been trading a trailing P/E discount to the US through most of the U.S. mega-cap market dominance in between 2015 and 2021.


Similarly for forecasted P/E, Europe (ex UK) has historically traded below the forecasted P/E for the US since 1995 but since March 2015 has traded systematically below the U.S. valuation. The UK has been trading at a discount  since November 2016 with the discount getting larger over the last 5 years,  Japan at a discount since April 2013, and Emerging Markets since July 2011.


Currently all the international regions displayed are trading at a discount to the US equity market.  Much of the divergence in the last 5 years was due to U.S. mega-cap outperformance.  It does offer the opportunity for the international returns in the future to revert to closer to par with the valuations with the U.S. market.  


Trailing P/E Ratio: International vs. U.S.


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Forecast P/E Ratio: International vs. U.S.


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