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 At 16.5 times forward estimates, the S&P 500, up less than 2 percent
for the year to date through midday Friday, is about 10 percent more
expensive than its historic average of 15, according to Thomson
Reuters estimates. While still well below the 24.5 ratio at the
height of the dot-com era bubble in 1999, the price to earnings
multiple recently hit its highest level since 2004.
At a time when corporate earnings are expected to show a decline of
3 percent in the most recent quarter, this has prompted more fund
managers to head for European or Japanese stocks that trade at lower
prices and may offer better returns in the year ahead.
"The question isn't whether valuations are above average but by how
much. Overseas they've still got a long runway in terms of earnings
potential," said David Francis, co-manager of the $1.7 billion
Thrivent Large Cap Fund.
Francis now has 58 percent of his portfolio on U.S. stocks, a drop
of nearly 30 percentage points from the 86 percent of assets he held
in the United States in 2012.
Overall, the average international fund tracked by Lipper has
dropped its average holdings of U.S. stocks by slightly more than 2
percent over the last year, in favor of less-expensive markets such
as Europe and Japan.
Funds that have moved to either market have been rewarded, with the
Euro Stoxx 600 posting a gain of 11.2 percent for the year to date
and the Nikkei index up 13.3 percent over the same time.
REASONS FOR BULLISHNESS
The call for moving to overseas markets based on valuation alone is
not clear cut, however.
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While the Euro Stoxx 600 trades at a less expensive 14.9 times
forward earnings, it has been cheaper than the S&P 500 since
mid-2002 and the two are currently closer than has been typical over
the last five years, according to Thomson Reuters data.
Abnormally low interest rates and core inflation in the U.S. are
distorting valuation metrics, said Phil Orlando, a senior portfolio
manager at Federated Investors who oversees its Global Allocation
fund. Orlando still expects the S&P 500 to rally 13 percent from its
current level this year, in part because he sees the overall economy
growing faster than analysts predict.
"Folks who say that stocks are fairly or over valued now are just
looking at one metric of P/E based on history, but they are ignoring
the fact that interest rates and inflation are about 65 percent
below where they normally are. When those two are low, the P/E
should naturally be higher," Orlando said.
(Reporting by David Randall and Rodrigo Campos; editing by Linda
Stern and Chizu Nomiyama)
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