Stocks are Overpriced!

Posted by: Ben Levisohn on November 3, 2009

Equities are expensive, says High Frequency Economics chief economist Carl B. Weinberg. But before you start dumping all the stocks in your portfolio, pay heed – it’s Europe, Japan and England – not the U.S. – you need to worry about.

During the past two quarters, U.S. investors have become accustomed to companies beating earnings estimates. Sure, much of that has been done with cost cutting, but a beat is a beat. In Europe and Japan, however, third quarter corporate earnings have been coming in below expectations. That’s impacted valuations across the board. The Japanese Nikkei 225 has a trailing p-e of 37.58, the Xetra DAX 100 has a p-e of 43.95 and England’s FTSE 100 has a p-e of 21.15. The S&P 500, in contrast, has a p-e of just 21.15.

The difference, Weinberg says, stems from labor market differences. In the U.S., job cuts have been deep and painful, but they’ve also been quick. Costs have quickly been realigned and that’s helped keep price-to-earnings ratios near “historical norms,” Weinberg says. European and Japanese lack the flexibility to cut wages or lay workers off to match falling demand. That’s good for workers but bad for valuations. Says Weinberg: “This will be a bad season for [Japanese, Euroland and London] stocks.”

Reader Comments

Leon

November 3, 2009 11:05 PM

I rather be in Europe and Japan than in US. At least I would have a higher chance to keep my job and get paid reasonably. Who cares about rising stock prices? It will not feed me if I am not a major investor. Only a job can feed my family and myself. High stock prices only benefit the senior executives with large stock options and whose performance bonuses are tied to the price of their company stock. Why enrich the top few but making the bulk of the people to suffer? I will take the European or Japanese system any time.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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