S&P 500 PE Ratio: Is It Time to Look Elsewhere
The S&P 500 PE ratio is sitting at 26 — roughly 30% above the global average. For passive investors, this is increasingly hard to ignore. A large portion of passive capital is concentrated in S&P 500 tracking ETFs, and within the index itself, a small group of mega-cap companies — the “Magnificent 7” — commands an outsized share.
We will leave the question of Magnificent 7 valuations for a separate discussion. Here, we focus on a more specific question: if an investor is looking to allocate outside US equities, where should that capital go?
Global Allocation – What Does the Market Tell Us
To approach this question, we consider the Vanguard Total World Stock ETF (VT), which tracks the FTSE Global All Cap Index. This index represents the global investable equity universe, covering over 9,000 publicly listed companies and approximately $83 billion in assets under management.
We compare the weight of companies domiciled in major economies within the ETF to each country’s share of global GDP. GDP data is sourced from Trading Economics.
| Weight in VT ETF | % of World GDP | |
| Unted States | 58,0% | 27,3% |
| Japan | 6,0% | 3,8% |
| United Kingdom | 3,5% | 3,2% |
| Canada | 2,7% | 2,1% |
| China | 2,7% | 16,7% |
| Taiwan | 2,5% | 0,8% |
| Switzerland | 2,3% | 0,8% |
| South Korea | 2,0% | 1,7% |
| Germany | 1,9% | 4,2% |
| France | 1,8% | 2,9% |
It is important to interpret the table correctly. US equities represent approximately 58% of the ETF, while the US accounts for 27.3% of global GDP. This indicates a significant overweight relative to economic size. Japan also appears overrepresented, with a 6% weight versus 3.8% GDP share.
Other markets such as the UK, Canada, Switzerland, Taiwan, and South Korea also appear overrepresented. In several cases, this reflects the presence of one or a few very large globally competitive companies (e.g. Taiwan Semiconductor for Taiwan, Samsung for South Korea).
On the other hand, Germany, France, and especially China appear underrepresented. China accounts for approximately 16.7% of global GDP but only 2.7% of the ETF weight.
At first glance, this may suggest that Chinese equities could increase their share within global indices over time. However, it is important to note that equity market weights reflect not only economic size, but also profitability, governance, and accessibility to global investors.
Valuations Across Markets
We now turn to valuations. For this purpose, we use a set of country ETFs launched between 1996 and 2000. These ETFs provide long-term USD return data and comparable valuation metrics. We acknowledge that ETF composition may not perfectly represent each domestic market, but the consistency and availability of data make this a useful approximation.
S&P 500 PE Ratio vs. Global Markets
Using country ETFs with 25+ years of data, here is how the S&P 500 PE ratio compares to major peers:
| ETF | PE Ratio | PB Ratio | 10 yr return | Since Inception (25Y+) | |
| United States | SPY | 26 | 4,8 | 15,3% | 10,7% |
| Japan | EWJ | 18,8 | 2 | 7,2% | 2,4% |
| United Kingdom | EWU | 16,6 | 2,3 | 7,3% | 5,9% |
| Canada | EWC | 19,4 | 2,6 | 12,0% | 8,8% |
| China/Hong Kong | EWH | 18,1 | 1,1 | 4,3% | 4,9% |
| Taiwan | EWT | 21,2 | 2,7 | 15,2% | 5,5% |
| Switzerland | EWL | 22 | 3,9 | 9,0% | 7,6% |
| South Korea | EWY | 17,7 | 2 | 8.9% | 7,7% |
| Germany | EWG | 16,9 | 1,9 | 7,4% | 6,4% |
| France | EWQ | 17,2 | 2 | 9,3% | 7,1% |
| Average | 19,4 | 2,5 | 9,7% | 6,7% |
Average:
- PE: 19.4
- PB: 2.5
- 10Y Return: 9.7%
- Since Inception: 6.7%
Returns reflect both local equity performance and currency effects.
The US market trades at a premium relative to global peers. With a PE of 26 versus an average of ~19, US equities are priced roughly 30% higher. A similar pattern is visible in price-to-book ratios, where the US stands at 4.8 versus a global average near 2.5.
Most other markets cluster within a relatively tight valuation range, typically between 16–20 PE. One notable exception is Hong Kong (used here as a proxy for Chinese equities), where valuations are significantly lower, particularly on a price-to-book basis.
China – Discount and Drivers
Chinese equities trade at a meaningful discount relative to US markets. In some cases, after adjusting for cash balances, valuations can appear several times lower.
There are several reasons for this:
- Slower economic growth relative to historical trends
- Weak consumer confidence following the real estate correction
- Government intervention and regulatory uncertainty
In our view, the first two factors are cyclical and may improve over time. Government intervention, however, remains a structural risk.
That said, current valuations appear to compensate for a significant portion of these risks. In addition, policy direction in China has increasingly focused on redirecting domestic savings from real estate into public equity markets.
Given these considerations, we prefer exposure through Hong Kong-listed equities, where risks related to US listing structures and potential de-listings are reduced.
Conclusion
The S&P 500 PE ratio signals a 30% premium over most developed and emerging markets. That premium has historical justification — US corporate profitability and governance are genuinely superior. But the concentration of passive flows into US indices amplifies valuation risk.
For investors considering diversification, China-linked equities offer the most compelling combination of low valuations and potential upside — with real risks attached. Possible vehicles include EWH (Hong Kong), FXI (China large-cap), or EXXU (Europe-listed China ETF).