The table below presents the historical and current CAPE ratios of the world’s largest equity markets. Among the biggest economies, India, the U.S., and Japan stand out as having the most expensive stock markets. However, it’s important to note that the CAPE ratios of different markets should not be directly compared. The most effective way to assess whether a country’s stock market is undervalued or overvalued is by comparing its current ratio to its historical average.

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Global CAPE Ratios by Country

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Using CAPE Ratio to estimate global stock market valuations

The idea behind the CAPE ratio is that company earnings tend to be volatile and cyclical fluctuations have a huge impact on the traditional trailing 12-month P/E ratio. Instead of using annual earnings, CAPE ratio uses the average (inflation-adjusted) earnings of the last 10 years to smoothen out any regular cyclical variations.

Professor Shiller popularized the ratio when he demonstrated the clear historical relationship between the ratio and market returns when calculated for the S&P 500 index. Multiple studies have shown that Shiller PE can be successfully applied also to global markets.

For additional information about using CAPE on a global scale, check the writings by Meb Faber. Mr. Faber’s blog covers practically everything you need to know about the ratio.

Global stock market valuations in 2025

Based solely on the CAPE ratio, the most expensive stock markets can be found from India, the U.S. and Japan. The Indian stock market has been trading at high multiples for many years but the nation’s equities just refuse to correct but keep reaching for higher levels. The high CAPE ratio of Japan is explained by the strong performance of the country’s stock market during the recent years and strong earning of the Japanese stock market. The trailing P/E ratio of the country is still quite reasonable.

The most undervalued nations are Hong Kong, South Korea, and China. Both the Chinese and the Korean economies are facing multiple challenges so the low stock market valuations are easily justified.

So should you sell all your U.S. stocks and buy Chinese equities instead?

The case of Russia is a good example of the limitations of just looking at valuation metrics when making investment decisions. Moscow’s stock market has always look cheap across all different valuation ratios and multiples. But when the Russia Ukraine war started, it immediately become painfully obvious to all Western investors that the Russian stocks have been cheap for a reason. At the moment, the country’s equity market is pretty much uninvestable for all but Russian citizens.

Valuations vs. Market Liquidity: Which Matters More?

Traditionally, the relationship between market liquidity (the availability of money) and valuations has been clear-cut. Liquidity plays a crucial role in short-term price fluctuations and overall market stability, but in the long run, stock prices are expected to align with fundamental valuations. The core belief has always been that if valuations become excessively high compared to underlying fundamentals, a correction is inevitable.

But is this long-held assumption still valid?

In today’s financial landscape, central banks are actively navigating between quantitative easing (QE) and quantitative tightening (QT), injecting or withdrawing liquidity from markets at unprecedented scales. Could it be that liquidity itself has become a primary driver of stock prices—not just in the short term, but also in the long term?

Furthermore, stock prices influence corporate behavior. A high stock price can boost confidence, encourage risk-taking, and even shape executive decision-making, potentially driving future growth and earnings. In this context, does the stock price determine a company’s success, rather than merely reflecting it?

Additionally, the rise of passive investing—where capital flows indiscriminately into stocks based on index weightings rather than fundamentals—raises another question: Are traditional valuation metrics becoming obsolete? If money flows into stocks regardless of valuation, does comparing current multiples to historical levels even make sense anymore?

We are in the midst of a massive financial experiment, where governments and central banks play an increasingly dominant role in market dynamics. The question remains: Will the old rules of investing still hold in the future, or are we entering a new era where liquidity, rather than valuations, dictates stock prices indefinitely?