Equity Strategy: Multiples at market trough - International equities show more favourable tradeoff vs the US

Speaker: Mislav Matejka, Head of Global Equity Strategy.

 

We reiterate our call that equities are helped by the likely peaking out in bond yields and a turn lower in inflation, which will lend support to P/E multiples, as well as allow the Growth style/Tech to stabilize. This goes along with still record negative investor sentiment, light positioning, supportive seasonals into year end, China reopening and the likelihood of smaller than typical earnings contraction. In this note we address what P/E multiples were typically seen at market troughs. Looking at forward consensus P/Es in the past 4-5 recessions, for Eurozone the median was 9x, and the same for the UK - 9.1x. A few weeks ago we were very close to these levels, we touched 10.2x for Eurozone, a point away, and as low as 8.7x for UK, outright below. We do not think that European P/E multiples need to move lower than these levels. For the US, in the past 4 downturns the forward P/E multiples troughed between 10x and 14x, vs the latest reading of 17x, and the low reached in October of 15.6x. This is somewhat higher than the past lows recorded. Having said that, the P/E contraction in SPX so far, from cycle peak to recent low, of 7 points, ranks on par with past recessions. The important consideration for sustainable P/Es will have to be the inflation path. If inflation proves to be much stickier than we think, real yields will need to go higher, pushing P/E multiples lower. Our call remains that inflation will come off, and follow growth lower, as is typically the case. In relative terms, we note that International markets continue to trade at a significant discount to the US. Eurozone forward P/E relative to the US is at 0.67x, lower than what was observed during any of the past 4-5 crises, and even like for like, sector neutral, Eurozone trades at only 0.78x P/E of the US. The clear valuation advantage is one of the reasons why we do not believe Europe, and International stocks more broadly, are an easy short vs the US, even if one expects overall market downside. We started the year looking for regional convergence between International and the US equities, and believe this will continue to work, from here, likely even in USD terms, and not just in lc.

 

This podcast was recorded on 14 November 2022.

This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4261272-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2022 JPMorgan Chase & Co. All rights reserved.