Investing in the US stockmarket is a hefty bet on big tech

The US market looks expensive with or without the FAANGs – but they will surely decide its fate.

The US is an expensive market by international standards – even more so now that it’s recovered from the March lows faster than any other region. At the end of May, the MSCI USA traded on a price/earnings (p/e) ratio of more than 22. The MSCI Europe traded on a p/e of 15. The MSCI Japan was also valued at around the same, while the MSCI Emerging Markets is slightly cheaper at 14. If you look at price/book value or dividend yields instead, the same pattern holds.

However, there are complications in comparing international markets like this – the composition of each market can be very different. This tends to be obvious when the index is dominated by a handful of companies or a couple of sectors – we see this most clearly with small economies or emerging markets, especially those dependent on natural resources. Large markets should be more easily compared – but in many respects, these indices still vary more than you might expect. For example, IT accounts for around 26% in the US, but just 7% in Europe. Industrials are 20% of the Japanese market, but 8% of American stocks. Financials are the single biggest sector in emerging markets overall.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.