Which stock markets are still expensive?
The slump in US and global shares, coming as it does after a long period of sustained rises, erases only two months of gains – taking the market back just to the levels of December 2017. To many market commentators that would still leave US shares dangerously overvalued.
That’s because one of the most respected measures of whether share prices are cheap or expensive, known as the “Cape”, has for a long time signalled that the US stock market represents particularly poor value for buyers.
Cape stands for the “cyclically adjusted price to earnings” ratio. It compares companies’ average annual earnings over 10 years (adjusted for inflation) with an up-to-date share price.
The ratio can also be calculated for an entire market or index – the UK market’s Cape score, for instance, is 16.5. This is according to calculations by Star Capital, a German firm of investment analysts. The bigger the number, the more overvalued a share or market is likely to be.
A lower Cape score is not on its own a reason to buy a share or index, and a high value does not automatically mean that investors should steer clear. But the ratio can offer a useful starting point to judge whether markets are overvalued.
Even the falls seen this week have not made shares cheap in some markets. By Laura Suter
The US was one of the most expensive markets going into this week’s crash. As of December last year, the most recent data available, the country had a Cape measure of 30.5.
This week’s share price falls will not have been enough to make an appreciable difference.
The score had risen from 28.5 in the middle of last year – and has been getting steadily more expensive. The average Cape for US markets, over the past 35 years, is 19.6. This Cape rating
Ireland has one of the world’s most expensively valued stock markets