US stocks have been grabbing headlines for looking increasingly expensive. But for everyday investors, the world is a big place, and the US isn't the only game in town. So let's widen the lens and see how other major markets stack up.
To compare markets fairly, we can use three simple measures: what you pay for a year of profits (a plain price-to-earnings ratio), what you pay for a decade of them, and how much more those profits earn you than a government bond. These tools help cut through the noise and show which markets are demanding a premium and which are offering a bargain.
The US dominates—but it's not everything
Let's be honest: the US is the world's stock market, more or less. It's over 70% bigger than the next nine countries combined. That dominance is reflected in any global index fund. In Vanguard's Total World Stock ETF, for example, America makes up the lion's share of the portfolio. If you own a global fund, you're mostly betting on the US, whether you realise it or not.
But that doesn't mean other markets are irrelevant. In fact, when US valuations get stretched, investors often start looking elsewhere for opportunities. And right now, the gap between US and non-US valuations is unusually wide.
How to read the valuation measures
The first measure is the classic price-to-earnings (P/E) ratio—the price you pay for each dollar of a company's annual profit. A higher P/E means you're paying more for the same earnings, which can signal that a market is expensive or that investors expect strong growth ahead.
The second measure extends that to a decade of profits. This longer view smooths out short-term swings and gives a sense of whether today's prices are justified by the earnings power over a full business cycle.
The third measure compares stock earnings to government bond yields. When stocks offer a higher earnings yield than bonds, they may be more attractive relative to safer assets. When the gap narrows, stocks look less compelling.
Where the cheap and expensive markets are
By these measures, the US stands out as the priciest major market. Its P/E ratio is well above historical averages, and its earnings yield relative to bonds is thin. That doesn't mean US stocks will crash—but it does mean investors are paying a premium for the world's largest market.
In contrast, many other developed markets look more reasonably valued. European and Japanese stocks, for instance, tend to trade at lower P/E ratios than their US counterparts. Emerging markets, too, often offer higher earnings yields, though they come with their own risks, such as currency volatility and political instability.
It's worth noting that cheap can get cheaper. A low P/E doesn't guarantee a bargain if earnings are falling or if the market faces structural headwinds. But for investors looking to diversify beyond the US, these markets may offer better value on a simple valuation basis.
What it means for your money
For everyday investors, the takeaway is that you don't have to put all your eggs in the American basket. Global diversification can help smooth out the bumps, especially when one market gets pricey. Many index funds and ETFs already give you broad international exposure, so you may already own a slice of these cheaper markets without realising it.
That said, diversification isn't a free lunch. International stocks can be more volatile, and currency swings can eat into returns. But over the long run, having a mix of markets can reduce risk and improve the odds of steady growth.
As always, it's not about timing the market—it's about time in the market. Whether you stick with the US or look further afield, the key is to stay invested and keep costs low.
For more on how global markets are moving, check out our coverage of Asia stocks mixed as oil slips and China and Hong Kong stocks slipping. And if you're watching the commodity side, see oil dropping below $100 and copper prices climbing.
