ETF Trends
ETF Trends

With the various issues plaguing Europe over the past few years, it isn’t surprising that equity market valuations have been depressed. Yet given the general feeling that the worst of the European crisis may be behind us, allocations to Europe have been increasing and certain markets have experienced strong gains in 2013.

Some may feel they missed the rally or that valuations are stretched. Yet if the earnings cycle is just starting to turn up, there could still be opportunities for growth in earnings as I discussed in a previous blog post. To provide context for the current valuations, we compare both the trailing and estimated price-to-earnings (P/E) ratio for the 10 largest developed European countries to other regional indexes and their historical medians.

Figure 1: Regional and Country Price-to-Earnings Ratios

For definitions of indexes in the chart, please visit our Glossary.

Estimated Earnings Improvement Strong for Europe – Of the major regional indexes, the MSCI Europe Index showed the largest improvement in the estimated P/E ratio, thus signaling the greatest expectations for earnings growth compared to the S&P 500 and MSCI Emerging Markets indexes.

• Within Europe, the best improvements in expected earnings look to be in Italy and Spain, which have elevated P/E ratios on a trailing 12-month basis but see more normalized earnings and valuations in line with the rest of Europe. It is important for these two countries to begin normalizing, because they have provided some of the greatest headwinds for the European economy over the past six quarters.

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