Cars on the road

US equity market experiences one of its largest PE de-ratings in 30 years

July 19, 2022
Market Navigation

The scale of decline in valuations was one of the largest de-ratings witnessed in 30 years

A notable feature of the market fall over the course of the first half of 2022 was the scale of valuation shift it produced.

As can be seen in Chart 1 the US and UK markets witnessed the largest proportionate decline in their PE levels comparing mid - year valuations with those as at year end 2021.The US PE valuation has fallen -26.8% from 22.5x to 16.4x over a six-month period.

Chart 1: Regional 12M PE ratios - now v levels at the end of 2021

The 6 months decline in the US PE ratio has been one of the largest in 30 years

Measuring the six month change in the market PE and comparing this to historical moves we can see in Chart 2 that the recent decline US has experienced a statistically significant (3 standard deviation) valuation correction. This is one of the largest moves over the last 30 years.

Chart 2: Measuring the 6-month change in the US 12M PE

 

The valuation effect was the key driver behind negative returns in 2022

Chart 3 below decomposes market return drivers into three categories - the contribution of changes to EPS forecasts, Dividends and Valuations. YTD data as at end June 2022 clearly shows the scale of performance drag delivered by the decline in PE valuations

Chart 3: YTD regional market return decomposition

PE relative analysis highlight interesting global valuation dynamics

A function of the US market experiencing a proportionately large PE de-rating is that it has seen its PE relative premium (comparing the PE of the US market to that of the World ex US market) decline from a peak of 55% in March this year to a current level of 32%.

By contrast the PE relative for Emerging Markets has moved from a c. 20% discount to parity - something last seen in 2016.

Chart 4: PE relatives comparisons

Index 15303321 E0922

Writer

Philip Lawlor

Managing Director,  Market Research (Benchmarks)

Important Information

Wilshire is a global financial services firm providing diverse services to various types of investors and intermediaries. Wilshire’s products, services, investment approach and advice may differ between clients and all of Wilshire’s products and services may not be available to all clients. For more information regarding Wilshire’s services, please see Wilshire’s ADV Part 2 available at www.wilshire.com/ADV.

This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice.

This material contains proprietary information of Wilshire. It may not be disclosed, reproduced, or otherwise distributed, in whole or in part, to any other person or entity without prior written permission from Wilshire.

This material represents the current opinion of Wilshire and is subject to change without notice. Wilshire assumes no duty to update any such opinions. Wilshire believes that the information obtained from third party sources contained herein is reliable, but has not undertaken to verify such information. Wilshire gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error,omission or inaccuracy in such information and for results obtained from its use.

This material may include estimates, projections, assumptions and other "forward-looking statements". Forward-looking statements represent Wilshire's current beliefs and opinions in respect of potentialfuture events. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual events, performance and financial results to differ materially from any projections. Forward-looking statements speak only as of the date on which they are made and are subject to change without notice. Wilshire undertakes no obligation to update or revise any forward-looking statements.

Wilshire Advisors LLC (Wilshire) is an investment advisor registered with the SEC. Wilshire® is a registered service mark. All other trade names, trademarks, and/or service marks are the property of their respective holders.

Copyright © 2022 Wilshire. All rights reserved.

See more

We’re here to help

Wilshire has been applying highly tested theories and approaches to our client solutions since 1981.

You can count on our team of experts to help improve investment outcomes for a better future.

Contact us