U.S. stocks have been outpacing earnings growth in recent periods. This means that price-earnings multiples have been expanding.
However, Morgan Stanley’s Greg Peters is concerned that these multiples are getting a little too high for comfort.
“Our regional preference is for [Emerging Markets], and in particular [Asia excluding Japan] over [Latin America], while we would underweight the US, as it is a relatively expensive market, a crowded trade, and has the most earnings risk,” writes Peters.
Barclays’ global equity strategy team is also concerned about U.S. valuation as measured by the cyclically adjusted price-earnings ratio, a P/E ratio based on long-term average earnings.
Unlike Morgan Stanley, Barclays sees better value in Europe.
“Of the 10 cheapest regional indices based on the Cyclically Adjusted PE (Shiller PE), 8 are from developed Europe,” wrote Barclays in a note published last week. “We think the value attraction we witness within European equities, along with the general underweight positioning, should continue to drive European equities higher in 2013.”
Here’s a chart of cyclically adjusted PEs around the world from Barclays:
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