As 2025 winds down, you will probably read a lot of articles remarking how international stock indexes have outperformed US stock indexes like the S&P 500 by a significant amount this year. This hasn’t happened in a while! Yet, the following chart shows that the gap in valuations is still very wide.
PE10 stands for the ratio of price to 10-year average trailing earnings (AKA CAPE ratio, or cyclically-adjusted P/E ratio) which attempts to smooth out earnings spikes. Image via TopDownCharts.
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This gap was almost entirely driven by the US tech Magnificent 7. The broad US market strongly resembles the rest of the world. Scroll down to chart with this part:
“3. Strip out the Magnificent-7 and European companies have been almost as good at growing earnings as US ones”
https://www.firstlinks.com.au/the-case-for-and-against-us-stock-market-exceptionalism
Many people bet on Bitcoin, permanent remote work, Biden’s green programs, AI, etc. Some of this gap follows from self-feeding momentum players. We’ll learn who was ‘rational’ in a few decades. Maybe.
The U.S. market has a much higher sector weighting to technology than the other developed countries. Technology companies are asset-lite businesses with high margins and generally have higher valuations. That said, on a sector-neutral basis, the U.S. is still more expensive than international developed markets, though not nearly as much as at the headline level.