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