February 4, 5:00 pm EST
U.S. stocks are being valued right at the long-term P/E, just under 16x forward earnings. And remember, that’s in an ultra-low interest rate environment (still).
Historically, in low rate environments stocks trade north of 20 times earnings. With the Fed now on hold, and the 10-year yield back below 3%, if we continue to see this sweet spot of good economic activity and subdued inflation, we should see this multiple on stocks expand toward 20 this year.
If we multiply Wall Street’s 2019 earnings estimate on the S&P 500 ($172) times a P/E of 20, we get 3,440 in the S&P 500. That’s 26% higher than current levels.
Now, stocks in the U.K., Germany and Japan are all trading closer to 12x forward earnings. That’s cheap relative to long-term averages, and especially cheap relative to U.S. stocks. For perspective, Japanese stocks are recovering back toward the highest levels in more than 25 years, yet the forward P/E on Japanese stocks is closer to the lowest levels over the period.
From a technical perspective, Japanese stocks should follow the lead of this big trend break in U.S. stocks…
Here’s a look at the Nikkei and the opportunity to see this “laggard” catch up …