Which developed stock markets look cheap when you look back and to the future?

If you only looked at the UK market's trailing price/earnings (P/E) multiple, you could conclude that it was on the cheap side. This is a backward-looking measure which compares a company’s share price with its earnings over the past 12 months.

Alternatively you can look to the market’s future earnings prospects, by using the forward P/E. This compares a company’s share price with expectations for its earnings over the next 12 months .

By this measure the market looks expensive because the earnings outlook is poor.

In other words, looking to the future reveals there is a reason behind the UK’s apparent cheapness.

The chart below shows a two-dimensional analysis of developed stock market valuations, which allows a richer appreciation of where, if anywhere, looks cheap.

The x-axis shows how expensive or cheap a market is relative to its trailing price/earnings multiple over the past 15 years. The y-axis does the same but using the forward price/earnings multiple.

The result is a two-by-two grid. Markets in the right-hand side are expensive on a trailing price/earnings basis, with those on the left cheap. Markets in the top-half are expensive on a forward price/earnings basis, with those on the bottom-half cheap.

The top-right quadrant captures markets which are expensive on both bases. Unfortunately, this is where almost all developed markets lie today. No surprises that the US stock market is extended on both.

There are a limited number of markets, including the UK, which appear cheap on a trailing basis, but expensive on a forward basis. Not the bargains first impressions might make you might think. 

Simple messages are often the most popular (e.g. "the UK is cheap"), but reality is rarely that simple. You need to scratch beneath the surface.

Caveat: this analysis is based on valuation multiples at the overall market level. There is significant dispersion between individual sectors and companies. The hard work is unearthing those which are undervalued and/or have higher growth potential than is currently reflected in their share prices. Only active investors need apply.

Back and to the future

Developed market trailing and forward price/earnings valuation grid


Z-score is a measure of where the current level of the price/earnings multiple lies compared with its historical experience, calculated here using data over the past 15 years. A high figure indicates the current level is expensive versus history, a low level indicates it is cheap versus history.


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The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.