​​Global stock market valuations: analysing opportunities across major markets​​

Understanding current US market valuations

The United States (US) stock market continues to dominate global equities, representing over 60% of total world market capitalisation. This dominance has led to increasingly stretched valuations compared to historical averages.

The widely followed Buffett indicator, which measures total market capitalisation relative to gross domestic product (GDP), currently stands at 208% for US equities. This reading suggests significant overvaluation compared to long-term historical averages. The cyclically adjusted price-to-earnings (CAPE) ratio, developed by Robert Shiller, provides another warning signal at 31.12. This level sits well above the long-term average, indicating potential headwinds for future returns.

These elevated metrics suggest that US investors may need to temper their return expectations, though strong earnings growth could help justify current valuations.

Market cap to GDP chart

CAPE ratio chart

European markets offer relative value

European equities present a more compelling valuation picture in late 2024, with the United Kingdom (UK) CAPE ratio at 18.64 and Germany's at 20.07. Both readings sit well below US levels. The broad European market trades at a significant discount to the US, with sector-adjusted price-to-earnings ratios roughly 18% below American counterparts. This gap has widened in recent years.

UK equities, in particular, appear attractively valued, with the FTSE 100 trading at historically low multiples. This could present opportunities for long-term investors seeking value.

While European markets face their own challenges, including slower growth and geopolitical risks, current valuations may provide a margin of safety for patient investors.

Analysing Japanese market dynamics

Japan's equity market shows mixed valuation signals, with a market cap to GDP ratio of 164.64% suggesting overvaluation, though less extreme than the US. The Japanese CAPE ratio stands at 27.74, positioning it between US and European levels. This reflects ongoing corporate governance reforms and improving shareholder returns.

Recent policy changes and corporate restructuring efforts have made Japanese equities more attractive to global investors. The trading platform offers access to these opportunities. Value investors may find opportunities in specific Japanese sectors and companies, particularly those benefiting from ongoing reform efforts.

Investment implications for global investors

Investors should consider geographical diversification given varying valuation levels. The share trading platform enables access to global markets.

European markets may offer better value for those seeking new positions, while selective opportunities exist in Japanese equities. The trading signals service can help identify these. US investors might consider rebalancing portfolios and maintaining discipline around position sizing. Trading online allows for efficient portfolio management.

A balanced approach incorporating multiple regions could help optimise risk-adjusted returns in current market conditions.