Markets rarely turn on valuation levels alone. Most of the time it takes a case of irrational greed or fear to mark a turning point in the stock market. However, it is always wise to keep one eye on valuations in order to calibrate just how much more greed or fear can be squeezed out of current earnings.
On an equal-weighted basis, the average P/E in the MSCI World Index stands at a lofty 25.2x. As the title of this blog post states, not a single sector is trading below a 22.5x P/E level. In the Emerging Markets, valuations are not too far behind. The equal-weighted average P/E in the MSCI Emerging Markets Index stands at 21.9x. Two sectors in the Emerging Markets are trading below 20x P/E level (Utilities and Financials).
To get a more nuanced perspective on valuations, let's look at how the valuation distribution currently stands. In our work we cap all valuation ratios at 100x in order to limit outlier effects on aggregates as much as possible. Currently, 44 stocks or 2.7% of the total MSCI World Index is trading at 100x P/E. If we add the companies that have zero or negative earnings then this total moves up to 163 or 10.1%. On the other extreme, we count only 1 company with P/E ratio of less 1x and only 14 or, less than 1%, with a P/E ratio of 5x or less. Overall, 62.5% of all stocks are trading at a P/E multiple of 15x or greater.
Moving on to Emerging Markets, 13 or 1.6% of the total stocks in the MSCI Emerging Markets index are trading at a P/E ratio 100x. If we include stocks that have zero or negative earnings this total increases to 77 or 9.2%. Currently, zero stocks are trading at a P/E ratio of less than one and 21 or or 2.7% of stocks are trading at a P/E ratio of 5x or less. Overall, 51.8% of all Emerging Markets stocks are trading at a P/E ratio of 15x or greater.