Investing Ideas
Worried about U.S. stock valuations? Consider the ROE
There’s a wide return on equity gap between U.S. and international stocks and it could persist.
Key Takeaways
- Comparing U.S. stocks to non-U.S. stocks based only on valuation metrics such as price-earnings (PE) multiples ignores the drivers behind the long-term profit advantages of U.S. markets.
- Rather than just comparing PE multiples, investment allocators may want to study whether profit advantages in the U.S. are likely to persist.
- Return on equity (ROE), one profit measure that reflects on how well companies are run, has tended to be higher for U.S. stocks compared with international stocks.
- Reasons the ROE advantage for U.S. stocks may continue include first-mover advantages, more companies in high-margin sectors, pricing power, relative inflation resistance, capital-light structures, scalability, and more frequent share buybacks and dividend increases.
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Worried about U.S. stock valuations? Consider the ROE
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