The table below shows the P/E ratios (price-earnings) of the largest global markets, calculated using the benchmark equity index of each stock market. The table lists both trailing price-to-earnings and forward price-to-earnings ratios of the countries. During the height of the COVID-19 pandemic, the trailing P/E ratios of many markets were at very elevated levels due to large pandemic related losses of certain industries. As earnings have recovered, the multiples are back to more normal levels. Based on both trailing and forward looking multiples, India and U.S. seem to be the most expensive markets at the moment.

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Global P/E (Price-Earnings) Ratios by Country

* EPS (earnings per share) in the table above has been indexed to start from the base value of “100” in 1/1/2020.

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Valuations of Global Stock Markets

The most consistent story of the global equity markets over the past years has been the outperformance of U.S. compared to pretty all other developed or emerging stock markets. The main reason for the outperformance has not been just corporate earnings growth but increased multiples have played even a bigger role. Among all major markets, only India is trading at the same valuation levels as U.S stocks at the moment. However, there is a large difference in valuations between so called growth stocks and value stocks in North America and the valuation spread between growth and value has not been this large since the dot-com bubble over 20 years ago.

Trailing & Forward Price-Earnings Ratios

Price-to-earnings ratio is maybe the most fundamental metric used by investors when both individual companies and markets as a whole are evaluated. The ratio is easy to understand and calculate but the problem arrives when it’s time to select which earnings should you actually use. When you are using trailing earnings (earnings per share over the previous 12 months) you can be fully confident with your analysis as you are using actual figures instead of expected earnings which might turn out to be too optimistic or pessimistic.

However, investing is all about predicting the future and the phrase “past performance is no guarantee of future results” is one of the oldest clichés of the investing game. Stock analysts are generally quite accurate with their earnings projections when economic conditions are steady. However, when a recession hits a country, all predictions fly out of the window as analysts and economists are always working with linear models which never forecasts a recession.

When using trailing figures, you also need to make the choice whether you are using net income or operating income as your earnings. If you choose to use operating income, you will exclude certain expenses like taxes, interest expenses and nonrecurring items, such as expenses related to lawsuit settlements and asset write-downs. The ratios in the table above are calculated using net incomes that take account taxes and interest expenses. Also, negative earnings have been included in the calculations.