Regardless of whether one believes they’re heading higher or not, most investors can agree that U.S. stocks are relatively expensive―relative to the past and relative to stocks of other countries.
The trailing 12-month price-to-earnings ratio for the S&P 500 is 21.7, according to FactSet, the highest level since the Great Recession, and much higher than historical averages. For example, over the past 50 years, the S&P 500’s trailing P/E ratio has averaged 16.5; over the past 30 years, it has averaged 19.2; and over the past 10 years, it’s averaged 17.1.
There are many ways to justify the high valuations of U.S. stocks. The most popular explanations have to do with the fact that interest rates are historically low, and economic growth and corporate earnings are expected to accelerate thanks to the new administration’s policies of tax cuts and deregulation.