How richly-valued are US equities?

It’s all relative. To the dot-com bust.

I’m kidding. But not. Because as was the case in the go-go halcyon days of 2021 (when “stimmy” was coursing through America’s veins), the only analogue for today’s extreme readings on a variety of valuation metrics and measures of market concentration is the TMT bubble.

The simple visual above, from SocGen’s Andrew Lapthorne, gives you some context: The US is now totally disconnected from Europe on a median forward multiple.

The insensitive among you will say, “Well yeah. Europe hasn’t been cool since the Renaissance.” If that’s your rejoinder, first, don’t be an asshole. We may need Europe one day for something. I can’t think of what that would be right now, but something! Second, note that at least on this metric, the discrepancy is a very recent phenomenon. The US pretty much always trades somewhat rich to Europe, but not often this rich.

“At over 22x forward EPS, the S&P 500 is not too far away from its 1999/2000 peak, and the excuse of low discount rates/bond yields no longer holds,” Lapthorne wrote, before positing a possible explanation.

Look at the red line in the figure above. That’s the incredible shrinking US stock market.

“The US is the only region with higher valuations that is re-rating versus everywhere else,” Lapthorne went on, noting that although “the relative stability of US companies’ profitability and the lower return on equity elsewhere” explains some of the premium, “it is also the case that US stocks are increasingly in short supply.”

And what happens when short supply meets robust demand? Ask a CPI chart from mid-2022.