By any number of valuation metrics, U.S. stocks look quite expensive. Canadian shares, by comparison, look like a bargain.
U.S. equities have rarely been as pricey as they are today, based on the cyclically adjusted price-to-earnings (CAPE) ratio, which takes a longer view of stock performance over the economic cycle. The U.S. ratio divides share prices for S&P 500 companies by their average earnings over the past 10 years, adjusted for inflation. It’s also known as the Shiller ratio, named for economist Robert Shiller, who popularized this valuation metric.
Investors often use the CAPE ratio to assess the potential long-term returns for a group of stocks. In this instance, the elevated CAPE ratio of 36.6 suggests there’s limited upside for U.S. shares in the coming years. In a recent forecast, Goldman Sachs strategists said the S&P 500 will post an average annual return of 3 per cent over the next 10 years, compared with…
