Are US Stocks Too Expensive?

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By Jacob Maslow

vintage stock certificateIf you’re going to look at price per earnings ratio only, US stocks are quite expensive. In fact, it’s very hard to find a stock with a decent PE ratio unless of course we’re talking about giant companies. Outside of huge companies with titanic valuations, the typical stocks’ price per earnings ratio is stretched quite thin.

You have to remember that the price of a stock has to be based on some level of reality as far as the overall performance of the company behind the stock is concerned. This rule has been flushed down the toilet recently. It seems that due to the huge amount of stimulus money floating through equities market, traders have thrown all caution to the winds and just dug in. Stocks that you normally wouldn’t want to be associated with are oversubscribed.

It’s no surprise then that many veteran observers are looking to shift from US stocks to the stock of other countries. In particular, they’re looking for stock indexes that have under-performed. Alternatively, they’re looking for stock markets that haven’t really fully recovered from the great crash of 2008. While the United States, for example, has enjoyed a 170% rally in the S&P 500, other countries haven’t been as lucky. In fact, if you line up the Italian and Spanish stock markets alongside the S&P 500, you can see that these stock markets might be a great bargain. Their stock index has only advanced 40% while the US has enjoyed a 170% rally.

Be that as it may, it may seem like a sure thing. It might seem like all you need to do is look at market performance and read in market underappreciation. I suspect there’s a lot more going on behind the scenes here. There’s a reason why these stock markets are underperforming compared to the United States. It would really be foolish to just jump in and buy Spanish and Italian stocks wholesale without paying attention to market leadership, market share, industry dominance, and industry growth. In other words, when looking for alternative markets, don’t let go of stock picking common sense.

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